How a stocks and shares ISA works

Putting money into the stock market is a way to boost your chances of getting bigger returns from your savings - and about the only way to beat high inflation.

But things are a lot less certain than if you keep the money in a traditional cash savings account as there’s also more risk involved.

That said, there are ways to reduce the risks if you know what you're doing. Here we look at how you can use a stocks and shares ISA to reduce your tax bill while investing for growth.

What is a stocks and shares ISA?

It is a stocks and shares account that is made tax-efficient by using your ISA allowance.

Who can open one?

You have to be at least 18 years old and a UK resident with a National Insurance number to apply for a stocks and shares ISA.

How much can you invest?

The amount you can pay in each year is limited to your ISA allowance. This is £20,000 in the current tax year. The tax year runs from 6 April to 5 April the following year.

If you have already used any of your ISA allowance in a cash ISA or innovative finance ISA this tax year, you will need to deduct the amount from your overall ISA allowance to find out how much you can invest in a stocks and shares ISA.

How many stocks and shares ISAs can you have?

You can only pay into one investment ISA at a time.

But you could end up with several investment ISAs if you open and invest into a new one each tax year, rather than adding to an existing one.

Do you pay tax on stocks and shares ISAs?

You will not pay any tax income tax or capital gains tax on the return you make from a stocks and shares ISA, up to your annual allowance.

Where can you invest your ISA?

You can use your ISA wrapper across a range of investments. It’s really up to you and the options are vast.

The best way to choose is through your own research, by speaking to a financial adviser or using a funds supermarket.

The choice you make will depend upon your attitude to risk, your budget, and how much you want to manage your own investments or pay someone to help you.

Some of the investments you can use your ISA wrapper with include:

• Shares

• Funds

• Unit trusts

• Investment trusts

• OEICs

• Corporate bonds

You can invest in a stocks and shares ISA through an investment platform. This lets you check how your investment is doing and also add and withdraw your money.

How do you set up a stocks and shares ISA?

You can choose to invest in a stocks and shares ISA:

• Yourself: You can ISA wrap an investment through an investment platform, without the need for advice.

• Through an adviser: You will pay for advice on the right investments for your ISA wrapper and the option to regularly review your investments with a professional.

What are the charges?

This depends on which type of investment you want to ISA wrap, but the common fees and charges include:

• Platform charge: this can be a flat fee or a percentage of the value of your fund (for example, from no charge up to 4% or a flat fee of £100)

• Annual management charge: this is a percentage of your overall fund which is deducted every year (for example, from no charge up to 4.61%)

• Transaction charge: a flat fee for every time you buy or sell a fund (for example, £5 each time)

• Transfer out fee: a percentage or a flat fee per fund. The more funds you have to transfer out, the higher the cost will be (for example, from no charge up to 3% or £100 per fund).

Can you transfer your ISA?

Yes, but not all providers will let you move your ISA so always check first. The process of moving your ISA from one provider to another is called an ISA transfer, and the new provider will do all the work to transfer your ISA.

You can transfer your stocks and shares ISA to a cash ISA, and vice versa if you wish.

If transferring it to a new stocks and shares ISA you need to watch out for exit fees. These can vary significantly but can cost around £25 per holding.

It costs you less to transfer your stocks and shares ISA into a cash ISA, with exit fees usually a one-off amount such as £25.

Make sure you get advice from an independent financial advisor if you are not sure what to do.

Should you invest in a stocks and shares ISA?

A stocks and shares ISA could give you a much higher return than a cash ISA - but you could lose some or all your money if:

• The value of your investment falls

• Your return is less than the amount you pay in fees and charges

If you are not sure if you should invest in a stocks and shares ISA, a cash ISA or a combination of the two, then read our guide which could help you choose. It’s also worth remembering that investing isn’t a short-term option. 

Alternatively, you could speak to an independent financial advisor to discuss if stocks and shares ISAs are a good match for you.