How does a Stocks & Shares ISA work?

Simple, flexible and tax efficient, Stocks & Shares ISAs stand out as a home for investments, offering you freedom to invest how you choose.

| 9 min read

When you invest your money, it’s vital to make use of tax allowances. Individual Savings Accounts – or ISAs – are often a first port of call owing to their simplicity and flexibility. There are several types, notably Cash ISAs and Stocks & Shares ISAs. What unites them is that any money you make – either as interest on cash or investment income or gains – is free from tax, which can be really important for your long-term returns.

Most people are already familiar with Cash ISAs as a savings account, similar to a tax-free bank or building society account – but many are unfamiliar about how Stocks & Shares ISAs work and how to invest in them. So let’s explore how investment ISAs can make your savings work harder for you against inflation.

What is a Stocks & Shares ISA?

A Stocks & Shares ISA is an investment account that allows you to shelter money from tax (up to £20,000 per year) and invest in shares, funds, investment trusts and more. Vitally, any returns you make on your investments will be completely tax-free.

As high inflation risks eroding the value of cash in the UK, investment ISAs serve as a popular alternative to the more commonly known Cash ISAs, which also hold money but won’t allow you make your own investment decisions.

Simply put, a Stocks & Shares ISA will give your money the chance to grow faster than inflation through returns or gains on your investments. However, the value of investments can fall as well as rise. Investors may get back less than invested, especially in the short term.

Your ISA tax-free ‘allowance’ explained

There is a limit to how much you can pay into ISAs each tax year known as the ISA ‘allowance’, currently set at £20,000. This is available to any UK resident over 18 (over 16 for Cash ISAs) and it can be split between the different types.

One question we hear is: what is my tax allowance and why’s it important? Even if keeping your money outside the clutches of tax authorities doesn’t seem relevant now, it might in the future when your wealth grows. Over time you can shelter a substantial amount of money in ISAs. It can also keep things simple for you as income and gains from ISA investments don’t need to be declared on a tax return.

Remember, the ISA is a ‘use it or lose it’ annual allowance that can’t be carried over to the next tax year. If you don't utilise it before the end of the tax year on 5 April, it will be lost, resetting on 6th April.

Four habits of ISA millionaires

How does a Stocks & Shares ISA work?

A Stocks & Shares ISA offers the freedom to invest in markets and industries you want to target, while potentially enjoying returns as your investments grow – but these are only suitable if you are prepared to ride out the ups and downs that investing entails.

Investment ISAs are certainly not suitable for those with expensive debt to clear, and for those who have yet to build a cash reserve to cover emergencies and unexpected events a Cash ISA allowing quick access is likely to be more appropriate.

1. Flexible withdrawals

One of the main benefits of a Stocks & Shares ISA is the flexibility and freedom that comes with it. If you need access to your money, you can take it out at any time, though you may need to sell investments to fund any withdrawals. With many providers, this would result in the permanent loss of ISA allowance built up. However, at Charles Stanley, we are proud to be in the small minority of providers that offer a flexible Stocks & Shares ISA.

This means that as well as being able to invest in a wide range of assets, you can easily withdraw your money and, crucially, put it back again without affecting your annual tax-free ISA allowance. This can be a valuable facility for shorter-term business purposes or to plug a short-term need. The only requisite is you have to pay the money back in the same tax year.

2. Wide investment choice

It is possible to invest in an exceptionally wide range of investments through an ISA, depending on what the provider offers. Charles Stanley Direct caters for all levels of investors, offering simple solutions for first timers as well as a huge breadth of investment funds, UK and overseas shares, bonds, investment trusts and ETFs.

Not everyone has the time or knowledge to be an investing whizz, so to make life easy you could select a ready-made diversified portfolio in the form of multi-asset funds – such as those in the Charles Stanley range. Each fund is a professionally-managed portfolio in a single product. Our experts decide on an appropriate mix to balance risk and reward, adapting to changing conditions and trends. Investors do, however, need to be careful in selecting the fund(s) appropriate for their needs.

3. Choose how you invest

You can invest in a lump sum, a series of lump sums or monthly contributions. With Charles Stanley Direct you can set up a Direct Debit to invest from as little as £50 per month into your chosen investments.

4. Simple to transfer accounts

ISA holders can transfer their accounts without restriction or tax charge. A Cash ISA can be transferred to a Stocks & Shares ISA, and vice versa, allowing savers and investors to move their ISA savings into the account which suits them best.

5. Set investment goals

Once you are ready to invest with your ISA, it's important to set goals for your money and consider whether these are short-term or long-term in nature. Shorter-term needs are generally considered to be less than five years, perhaps putting money aside for a new car or for a house deposit for example.

Longer-term goals include getting ready for retirement or making provision for school or education fees likely to be incurred in ten or more years’ time.

Short-term needs are best addressed through saving cash and long-term ones through investing. Unlike cash, riskier assets do not offer the security of capital, but over the long term they tend to do better and therefore they build wealth more effectively.

Is there an ISA for children?

For children, there is a different type of account, the Junior ISA, where there is no access to the money in the account until the child reaches the age of 18. The maximum annual contribution is lower, at £9,000 currently.

Family and even friends can help build up tax-efficient investments for a child with the same tax benefits as an adult ISA. There is no capital gains tax and no further tax to pay on income, and it converts to a standard ISA from age 18 when withdrawals are possible.

They are a great way to invest for a child’s future, perhaps to provide a fund for university education or a deposit for a house.

Find out more

Should I use a pension or an ISA?

Those building extra savings for retirement may wish to consider a pension such as a SIPP (Self Invested Personal Pension) which offers income tax relief on contributions, although tax treatment depends on your individual circumstances and may be subject to change in the future. So, which do you choose to house your investments – a pension or an ISA?

For many people, a pension is the most tax-efficient means of saving for retirement, but an ISA provides more flexibility to access money when needed. It is important to note that you should prioritise any workplace pension available as you typically get valuable contributions from your employer, as well as tax relief, added to your pot.

Open a Stocks & Shares ISA

*Tax treatment depends on the individual circumstances of each person or entity and may be subject to change in the future.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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Stocks & Shares ISA

Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus.

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