General investment account vs ISA

The difference is largely in relation to tax. And while tax may not be the most exciting part of your investing adventure, it’s worth paying attention to, as it directly impacts how much of your gains or income you get to keep. 

Understanding when to use a general investment account vs an individual savings account, and how they can work together with a ‘Bed and ISA’ strategy, is one of the best early steps you can take as an investor.

So, what is a general investment account?

A general investment account, or investment account as we refer to it at Charles Stanley, is simply a standard taxable investment account. 

While certain providers might ask for minimum deposits, there’s almost never an annual limit on how much you can put in. You can then add and withdraw money at will.

With a general investment account, your money sits squarely within the UK tax system. Here are the three taxes you could have to pay in your GIA:

1. Capital gains tax (CGT) – when investments are sold and the gain is over and above the annual CGT allowance, basic-rate taxpayers will pay 18% and higher and additional-rate taxpayers will pay 24%.
2. Dividend tax – when dividends exceed the £500 annual allowance, a tax rate of 8.75% applies for basic-rate taxpayers, 33.75% for higher-rate taxpayers, and 39.35% for higher-rate taxpayers.
3. Income tax on interest – not to be overlooked, if you’re keeping your powder dry and have idle cash in your investment account, interest earned on that cash balance will be in the tax crosshairs if it’s over your Personal Savings Allowance. It is also worth noting that income from bonds and funds investing in them also counts as interest.

What is a Stocks and Shares ISA?

A Stocks & Shares ISA is an investment account that in many ways looks identical to a general investment account. You open it, fund it, and hopefully watch your investments grow over time. But it just happens to be one of the most generous tax shelters available to investors. 

Every pound earned in a Stocks and Shares ISA is exempt from all the above taxes, including income tax on interest on cash, which people don’t necessarily realise because there’s also the Cash ISA available. 

The annual Stocks and Shares ISA allowance is £20,000 per person, resetting each April. 

Flexible ISAs are available as well, which allow you to deposit and withdraw funds within the same tax year without using your annual allowance. In effect, you could deposit £5,000, then take out £2,000, and your allowance would only reduce by £3,000, not the original £5,000. 

We believe flexible ISAs have extra benefits and offer them so that investors have the option of short-term withdrawals from their ISA to help manage their personal finances.

General investment accounts vs ISAs

Objectively, Stocks and Shares ISAs are better for investors with £20,000 or less to invest.

The reason is tax, and this has only become more pronounced in recent years. In 2022, the annual CGT exemption stood at £12,300. It’s now just £3,000. The annual dividend allowance, previously £5,000, is now ten times smaller at £500. As these thresholds have fallen so drastically, more investors with standard GIAs are being pulled into the tax net.

For higher-rate taxpayers in particular, the arithmetic has a significant influence. If you receive £6,000 in annual dividends in a GIA, only £500 falls within the allowance. £5,500 would be taxed at 33.75%, which means a £1,856 liability. Within an ISA, £6,000 in annual dividends would incur no tax whatsoever. The long-term impact of that tax saving on the compound growth of your investments can be worth tens or even hundreds of thousands.

However, the GIA does still have a role to play. 

HMRC data shows that roughly 12 million adults subscribe to ISAs each year, yet average subscriptions are well below the maximum allowance. This suggests the £20,000 limit is enough for most people. But when it is used up, the GIA becomes another potential home for funds.

Making use of the GIA’s flexibility – probably its main advantage – is key to manage tax. For example, if you have investments to sell for profit, you can spread these across tax years to get the most benefit from your CGT allowance. You could also offset CGT with losses, or transfer assets to your spouse’s GIA if their allowances are unused. 

A perk of using a GIA can also be increased investment choice. Certain products, such as some offshore funds, simply aren’t allowed in ISAs because of HMRC rules. 

But to achieve a tax break on all your normal investments like shares, bonds and most exchange-traded funds, the best approach is usually to fund a Stocks and Shares ISA with a GIA over time with something called a “Bed and ISA”. Suppose you have £80,000 to invest this year. £20,000 can go into ISA investments straight away, and each year another £20,000 can be transferred from an GIA into that ISA. This involves selling and rebuying the investments in the GIA so there are costs involved and, potentially, tax to pay if there is a CGT liability resulting from the sales.

What is the best general investment account in the UK? 

“Best” depends on your needs. The best GIA is the one aligned with your portfolio size, investment style and long-term plan. For many investors, a general investment account’s main role is to hold money and assets before migrating to an ISA. If you hold both the GIA and the ISA with the same provider, that can help make the switch more cost effective – for example, with Charles Stanley Direct there is an overall fee cap that applies across all accounts – GIA, ISA and SIPP (Self Invested Personal Pension) and this can save money compared with providers that charge on a per-account basis.

In the meantime, clear and reliable reporting is particularly important within a general investment account. You need to be able to work out what you owe in capital gains and dividend tax, so this should be free and simple to look at.

Next, the scope of offering. As GIAs can offer certain products that are not allowed to be held in ISAs, it’s worth looking out for these if they interest you. Don’t overcomplicate your investments, but if you’re willing to do some deeper research, make sure you can access areas opportunities may be hiding.

And finally, cost is important. Some platforms charge percentage-based fees, which can be efficient for smaller portfolios but become more expensive as your investments grow. Others charge flat annual fees, or operate a cap such as Charles Stanley Direct, which may suit larger portfolios.

The best general investment account is the one that fits how you plan to use it.