Stocks & shares ISAs

Martin: "Done right, investing should beat saving"

Before we dive in to stocks and shares ISAs, it's important to understand when you should – and shouldn't – be considering investing.

What is a stocks and shares ISA?

A stocks & shares ISA is an account that lets you buy and sell investments (eg, funds, shares, bonds) where your returns are protected from various taxes. Every UK adult has a £20,000 annual ISA allowance and you can use some or all of it to invest using a stocks and shares ISA.

Investment returns, like most other forms of income, are subject to tax usually in one or all of three different ways…

• Capital Gains tax applies to profits from selling investments. You can earn £3,000 per year tax free, after which non-taxpayers don’t pay any (unless it takes you over your personal allowance), basic-rate taxpayers will pay 18% and it's 24% for higher or top rate.

• Dividends tax applies to annual income paid out by funds or shares (dividends). You can earn £500 per year tax free, after which which non-taxpayers don’t pay any (unless it takes you over your personal allowance), basic rate taxpayers will pay 10.75%, higher rate will pay 35.75% and top rate 39.75%.

• Savings tax applies to interest on bonds or gilts and also applies to non-investment savings earnings (eg, if you have cash held waiting to invest in an investment account). See our full how savings tax works guide on this as there are a few allowances.

All gains from investments held in a stocks and shares ISA are protected from these taxes. That's why they're so valuable.

So, if you've not yet used up your £20,000 annual ISA allowance for this tax year, then this should be your starting point. Not only will your returns be tax-free, but crucially, as these gains aren’t taxable, they won’t count towards your allowances, so you get them as well.

You must use your ISA allowance by 5 April – the end of the tax year – for it to count for that year. Any unused allowance doesn't roll over – so if you don't use it, you lose it forever. And everything in the ISA 'wrapper' stays tax-free year after year.

Watch Martin Lewis explain how investment taxes work.

Stocks and shares ISAs: what you need to know

Now that you understand what stocks and shares ISAs are and why they're useful, let's run through some key info on how to open and use them.

1. Open a stocks and shares ISA via an investment platform.

Investment platforms are essentially one-stop shops that allow you to open different types of investment accounts – such as stocks and shares ISAs and General Investment Accounts (GIAs) – and which offer a wide choice of investments.

Once you've signed up to a platform, you can then open a stocks and shares ISA and use it to buy and sell different types of investments (eg, funds, bonds, shares).

While it's possible to open a stocks and shares ISA directly with a bank or fund provider, you'll typically have a much smaller range of investment choices if you do.

2. Your investment portfolio can be 'DIY' or 'managed'.

A portfolio is just all of your investments. The main differences between 'DIY' and 'managed' portfolios are how much of your own research you plan to do, how much control you want over what you invest in and how much you want to pay.

• DIY portfolios. With do-it-yourself, you must do your own research to decide what to invest in and build and maintain your own portfolio. They're the cheaper option.

• Managed portfolios. There are two types – those that are managed by a set of real life experts, and those that are managed by an automated service (we call these 'robo'). Both types will help you to choose an investment portfolio, based on your attitude to risk and your investment goals. As they're more comprehensive, they're more expensive.

Some investment platforms only offer one type, some offer both, so do check.

3. Investment platforms charge a variety of different fees.

Most platforms charge account management fees based on a percentage of your investments, you'll also be charged fees when buying and selling the investments themselves, though some newer platforms offer low-cost alternatives. It's important to keep fees to a minimum as they'll eat into your earnings.

You can technically deal directly with fund managers, but bizarrely the investment industry is a strange world where going direct means bigger fees. Many investment platforms discount fees, but you don’t usually get that direct.

4. Tracker funds are a good starting point for beginners.

Funds are baskets of lots of different investments, usually of a similar class, so shares in smaller UK companies, or US technology companies. Or it could be a multi-asset fund, for example, 70% shares and 30% bonds. Buy the fund, and you own a slice of everything in it. Some parts will go up, some will go down, but you get the collective return across the basket.

As a beginner the type of funds you may want to look at are an S&P 500 tracker (biggest US firms) and/or a global tracker (often heavily US dominated with some other countries' firms in too) and/or maybe a FTSE 100 or 250 tracker too (for UK exposure). This will give you a decent spread that will mimic the performance of a big chunk of the world’s markets by value.

If this all sounds a little complicated, there's more info in our Investing for beginner's guide.

5. It's best to invest on a regular basis, little and often.

One way to mitigate any volatility, that many investment advisors suggest, is to drip feed a larger lump sum in smaller increments. Doing it little by little can help smooth out the regular short term ups and downs that are common.

If you invested all your money in one go, and the markets you invested in all suddenly tanked, you might start to panic. But by drip-feeding, it'd just mean you’d be buying some of your investments at a cheaper price.

6. You can transfer to another stocks and shares ISA (or cash ISA).

If you already have a stocks and shares ISA, you may want to transfer to a different platform, perhaps to take advantage of lower fees. To do this you’ll need to open the new account first, then tell your new platform you want to do an ISA transfer.

Never just sell up and withdraw the money – you'll lose all the tax-free benefits.

The new platform may not offer all the investment options your previous platform did. So, if there's a particular fund you like investing in, check it's available on the new platform too.

Or, if you don’t want to invest anymore, you can also transfer to a cash ISA instead (again, don't just transfer yourself, or it won't be tax free). You'll likely pay a closing fee (unless you’re staying with the same provider).

7. You'll usually be a 'beneficiary owner' of your investments.

Using a platform to buy investments means that you pay the platform to buy them for you, rather than buying them directly yourself. This means that the investments are usually legally owned either by the platform itself, or by a nominee company, and you become what is known as a beneficiary owner.

This means that, in the rare event of the platform collapsing, you wouldn't have ultimate control over your investments. In this case, your assets (eg, shares, funds) would either be transferred to another broker or sold and the cash returned to you.

For this reason, most platforms keep your assets separate from theirs – known as ringfencing – so that, in theory, they wouldn't be able to touch them even if they went bankrupt.

How do I choose a stocks and shares ISA platform?

We can't tell you what the best platform is. Our aim is to give you all the information so that you can make an informed decision to choose a platform that works for you...

Step 1: Decide if you want a 'DIY' or 'managed' platform.

We explained the differences between these two types of platforms above. In general, managed platforms can be a good choice for beginners, as you're getting all the work done for you, though they're more expensive.

In contrast, if you're an experienced investor, 'DIY' platforms give you more control and are cheaper, but there's more risk if you aren't confident in what you're putting your money into.

Step 2: Decide which investment platform works for you.

In our tables below, we've compiled a mix of both cheaper and well-known options, for both DIY platforms and for managed platforms (the links take you to the respective tables).

Keep an eye on fees, as which works out cheapest for you will depend on what you invest in, how much you have to invest and how often you trade. Managed platforms unsurprisingly tend to have higher management fees, though often costs are kept low as the funds which are typically chosen have low management fees.

Step 3: Check for intro cashback deals.

A few investment platforms offer newbie promo deals, such as cashback or free shares. All of these platforms let you invest in a wide range of funds.

This is a great way to dip your toe in the investing water with smaller amounts, as the freebies offset an element of risk. You can have as many stocks and shares ISAs as you like, so you could do some or all of these, provided the total doesn't go over your £20,000 ISA allowance.

The fees here could be higher than with the platforms above. These can eat away at any gains or cashback you get, so it's best to only go for these offers if you were planning to go with the platform anyway, or if you're comfortable with the fees compared to the options above.

Get free research to help choose what to invest in.

We don't cover what to invest in because we never want to have told you to put your money in something, only for you to lose money on it – though these sites do:

• Hargreaves Lansdown– helpful and easy-to-navigate site, including a 'Wealth Shortlist' – a collection of funds selected for their performance potential.

• Interactive Investor – includes beginners' guides on a range of investments, a glossary of terms and tables showing the 10 top, bottom and most-traded funds via its platform each month.

• Bestinvest– a large range of free guides covering everything from how to spot the worst-performing funds, to the top-rated funds.

• Charles Stanley Direct – the market data section breaks down lists of FTSE companies and allows you to check performance for any time period from one day to three years, updated every 15 minutes.

Stocks and shares ISA FAQs