What is a Stocks and Shares ISA? Complete Guide for Beginners

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Stocks and Shares ISA Guide

The UK has an excellent threshold system in place for those looking to save or invest money without having to pay tax on it. An Insurance Savings Account, or simply an ISA – gives all UK residents an annual allowance of £20,000 for the 2018/19 tax year, so it well worth taking full advantage of it.

Although ISAs are most commonly associated with savings accounts, they can also be utilized on stocks and shares. If at this point you remain confused, our comprehensive Guide to Stocks and Shares ISAs will tell you everything you need to know.

We’ll start by quickly clarifying what we mean when we discuss ISAs and why they can be financially favorable in comparison to other products. We’ll then proceed to discuss the fundamentals of a stocks and shares ISA and whether such a product is right for you. This will include a range of factors that you first need to consider prior to taking the plunge, as well as what associated fees you are likely to encounter.

Let’s start by making sure we understand what we mean by an ISA.

What is an ISA?

In a nutshell, an ISA allows you to save or invest money up to a particular amount without needing to pay any tax on the interest or gains you receive. The process was launched in 1999 by the then Tony Blair led Labour government and replaced the Tax-Exempt Special Savings Account (Cash ISA) and Personal Equity Plans (Stocks and Shares ISA).

The amount that you are allowed to inject in to an ISA changes on an annual basis. In the 2018/19 tax year, this amounts to a maximum of £20,000, which you can use on a cash ISA, stocks and shares ISA or a combination of both. Any interest that you make from a cash ISA, alongside any returns from a stocks and shares ISA – are free from tax up to the annual limit of £20,000.

Any interest that you make from a cash ISA, alongside any returns from a stocks and shares ISA – are free from tax up to the annual limit of £20,000.

The ISA time-frame correlates to the UK tax year, which runs from April 5th, to April 4th the following year. As a result, if you do not utilize your allowance prior to the tax year ending, it will not carry over to the following year.

It is important to remember that unlike a cash ISA – which is basically just a savings account that you don’t pay tax on, stocks and shares ISAs involve investing, meaning they carry the very same risks associated with the traditional financial markets.

What is a stocks and shares ISA?

Stocks and shares ISAs are essentially the same as any other stocks and shares investment, however they allow you to avoid a certain amount of taxation. In terms of the actual investment product, they cover everything from traditional blue-chip stocks, ETF’s and investment trusts, as well as government and corporate bonds.

Step 1: Which platform will you use?

When going through the stocks and shares ISA process, you will need to make some considerations on two separate fronts.

Firstly, you will need to find a platform that is legally certified to offer ISA products. This could be in the form of an online trading broker, or even your regular bank. Although you will be making savings on the taxation attributable to any financial gains that you make, each entity will offer their own individual pricing plans, meaning that you will need to pay a fee to use their services.

In most cases this will either be in the form of a fixed or percentage fee on the amount of funds you are investing. Which option you decide to use will ultimately depend on the value of your funds. Whilst a percentage fee is best suited for smaller investments, a flat fee is better for high valued accounts.

Fidelity International Review

Fidelity is a great provider of ISAs which is our recommendation, find out more in our review.

On top of this, you will also need to pay a trading fee for each purchase or sale you make. For example, if you purchased shares in a blue-chip company, you would be charged either a percentage or fixed fee on the size of the trade.

Moreover, you’ll more than likely be charged the same way when you sell the shares at a later date. If you think that you will be making regular trades throughout the year, you should ensure that the platform you use offers competitive trading fees.

You should also make considerations regarding any transferring out fees. This is the amount that the platform charges to move your investments over to another provider. Whilst some platforms do not charge for this, others do.

Finally, you should only ever use a platform that is covered by the Financial Services Compensation Scheme. This will allow you to claim up to £50,000 in the event that the platform goes bust.

Step 2: How will you choose what to invest in?

Once you have begun the process of finding a stocks and shares ISA platform, you also need to think about how involved you want to be in selecting investments. The buying and selling of financial products carries an inherent level of risk and there are no guarantees that you will make any money. Whilst it is highly favourable to make full use of an ISA investment product, your potential losses could outweigh any subsequent taxation savings.

Taking all of this in to consideration, you need to decide whether you want to choose what financial products to invest in, or whether you want someone else to do it for you.

Best Stocks & Shares ISA

Read: Best Stocks & Shares ISA Providers in the UK: Complete Guide

Stocks and shares ISAs: Going solo

If you decide to go solo, then you should have a firm understanding of how the financial markets work. This isn’t only in regards to the financial product itself, but the underlying risks associated with it. Moreover, you also need to understand that investing can be a highly emotional exercise, which if not kept in control – can result in irrational decision making.

Nevertheless, although going solo means the platform won’t tell you where to invest your funds, it should still have a comprehensive amount of information that will help you make a decision. One of the main benefits to a do-it-yourself approach is that your fees will be far lower than if you were to employ the services of a fund manager. Furthermore, the minimum amount that can be invested when solo trading is usually considerably lower, meaning that you have the option to drip-feed funds as and when you can afford it.

Best Cash ISA Providers

Read: Best Cash ISA Providers in the UK: Complete Guide

Using a fund manager

If the thoughts of building your own investment portfolio sounds daunting, then it might be worth considering the use of a fund manager. Essentially, the manager will take care of the entire investment decision making process. They will choose which financial instruments to buy, as well as determine what percentage of your investment they will allocate to each individual product. However, if you do go this route, you will be charged additional fees.

This is most commonly expressed as a percentage of the total amount you hold in the fund and can range anywhere from 0.1%-1% of your investment. More established fund managers will usually charge higher fees, so take this in to account before signing up.

Are the savings attributable to stocks and shares ISAs worth it?

In terms of the fundamentals, attempting to ascertain whether a stocks and shares ISA is worth it can at first glance seem complex. In a nut shell, it all depends on how much you are looking to invest. If you are looking at smaller amounts, then it might not be worth it, as you will already be in receipt of a tax-free allowance on both capital gains and dividends.

Capital Gains Tax

In the UK, when you make a profit on selling an investment product (such as shares or even a second property), you have to pay tax. This particular area of taxation is known as “Capital Gains” and it is primarily based on the amount of profit you made on the sale.

For example, if you purchased £5,000 worth of shares and later sold them for £6,000, then the amount of capital gains tax attributable would be based on the £1,000 profit. In the 2018/19 UK tax year, individuals are able to make up to £11,700 of profit before being liable for any capital gains tax. Moreover, this is separate to the amount of benefits available under a stocks and shares ISA.

As a result, your taxation benefits of an ISA would only surface if you made more than £11,700 in profit. Otherwise, the ISA would offer no advantages as the capital gains allowance already means you pay no tax.


When you buy shares in a traditional blue-chip company, you can make a profit if the value of share goes up, as well as in the form of dividends. Dividends are a way for companies to repay their shareholders and the amount paid-out is based on the reported profit the company makes. In the UK, you are allowed to earn up to £2,000 in annual dividends before being liable for tax.

In the UK, you are allowed to earn up to £2,000 in annual dividends before being liable for tax.

Once that amount is consumed, you will have to pay tax, which is a percentage based on your current tax-band. Nevertheless, as of the 2016/17 tax year, any dividends received as part of a stocks and shares ISA will be tax-free.

The long-term ISA game

In reality, you should only really consider a stocks and shares ISA if you are willing to hold on to your investment long-term. First and foremost, volatility levels associated with the financial markets can at times be very unpredictable. Therefore, by holding on to a financial product long-term, you have the potential to ride out the waves.

Although history suggests that a long-term holding of stocks and shares outperforms the interest offered by saving accounts, there are never any guarantees that this trend will continue. Ultimately, no matter what risk-category you opt for, investments can go up or down.

According to Martin Lewis at the Money Saving Expert, it is always best to hold on to your stocks and shares ISA for at least five years.

On the contrary, if you think you might need to access the money within a couple of years, it might be more beneficial to go for a cash ISA. Nevertheless, although ISAs can be withdrawn at any time of the year, your annual limit (£20,000 in 2018/19) does not reset.

For example, if you invested £5,000 in to a stocks and shares ISA in the 2018/19 tax year and withdrew it all in the same year, you would only have £15,000 remaining.

Stocks and shares ISAs – The verdict?

In conclusion, injecting money in to a stocks and shares ISA can result in excellent tax savings. As a result, if your personal circumstances are suitable, then it is highly beneficial to maximize these allowances as best you can. In the UK, that means that you can invest up to £20,000 over the course of the 2018/19 year, all of which will be treated as tax-free earnings.

However, you also need to take some time to consider whether you are actually going to benefit. The reason for this is that the UK already offers tax-free allowances on both capital gains and dividends, meaning that unless you earn over a certain amount, you might not actually gain from an ISA.

On a final note, it is imperative that you understand the underling risks involved in a product like stocks and shares ISAs, as there is no guarantee that you will make any money.

Kane Pepi

Kane holds a Bachelor's Degree in Accounting and Finance, a Master's Degree in Financial Investigation and he is currently engaged in a Doctorate - researching financial crime in the virtual economy. With a keen passion for research, he currently writes for a variety of publications within the Financial and Cryptocurrency industries.