What is a Stocks and Shares ISA?

A Stocks & Shares ISA – or Individual Savings Account - is one of the many types of ISA now available. It is an investment product, which means that your money is used to buy investments.

This inevitably means a certain amount of risk. With Stocks and Share ISAs, as with other investments, there can be no guarantees of returns. This makes them different from savings plans, which can deliver a low, but predictable rate of interest, with the safety of your cash underpinned by the government backed Financial Services Compensation Scheme (FSCS).

But in return for this risk, Stock and Shares ISAs should be able to offer the prospect of much more exciting returns than savings products – including Cash ISAs.

How does a Stock and Shares ISA work?

Stocks and Shares ISAs are available from a number of providers, from banks to specialist investment houses, and most let you put your money into a pooled account. Like other ISAs they can let your money grow faster, as there will be nothing to pay in tax while your money is invested. This means that the tax advantages of Stocks and Shares ISAs can still be very significant, particularly if you're a higher or additional-rate taxpayer. Your capital is at risk with this option.

What are the rules for a Stocks and Shares ISA?

All UK residents aged 18 or over can have a Stocks and Shares ISA. Crown employees serving overseas or their spouses can also open ISAs. However, the tax efficiency of ISA investments makes them valuable. The government has strict rules about using them, with the most important being the annual ISA allowance which for the 2020-21 tax year is £20,0000. Once you have used your ISA allowance for the tax year you must stop paying in – and you cannot carry any unused allowance over to the next year.

If you have to stop paying into your Stocks and Shares ISA, your investment will keep growing – and you can make new payments into the same account as soon as the next tax year begin.

The tax rules on Stocks and Share ISAs used to be a little more complicated than other types of ISA. This is because if you buy shares, or collective investments such shared funds, you're likely to receive dividends – and in the past, these were taxed even though they were in an ISA.

This is no longer the case. Any investments kept in a Stocks and Shares ISA will avoid tax on dividends altogether – and you will also avoid capital gains tax gains and income tax when you come to cash in your Stocks and Shares ISA.

How many Stocks and Shares ISAs can you have?

There is actually no limit for how many Stocks and Shares ISAs - or other types of ISA - you can have, but you can only pay into one of each different kind of ISA in the same tax year.

There is nothing to stop you opening a new Stocks and Shares ISA each year, but you might find it more rewarding to have just one and pay into it year after year. This could help avoid multiple management charges which would eat into your profits.

What are the best Stock and Shares ISA accounts?

There are many Stocks and Share ISAs providers to consider, but you need to be aware that many of these companies charge a fee for you to open and hold your ISA. Some even charge you if you want to change any of your investments, withdraw your money or move it to another company.

To decide on the best choice for you, you may need to look carefully at the charges involved, as well as the kind of profits that they have demonstrated in the past.

What are the different types of Stocks and Shares ISA?

With a Stocks and Shares ISA investment can be very simple. You can choose your own individual company shares and put them into your ISA. You can also include unit trusts, open-ended investment companies (Oeics) and investment trusts, as well as government bonds and corporate bonds.

You can choose from two types of pooled funds – actively managed and passively managed.

Actively managed funds are run by a fund manager who makes investment decisions on your behalf. They will try to deliver the best performance, and their stated aim will probably be to beat the overall returns of an investment benchmark or index.

A passively managed fund tracks a defined stock market and invests in the stocks that make it up. It will therefore simply match that market's returns or losses. The fees and charges may be lower than active funds because you don't have to pay a fund manager, which means more of your money is invested.

Both types of funds let you invest your money in the sectors and markets you choose. There are funds for every type of asset, from low-risk UK government bonds or gilts, to higher-risk global stocks, and markets from petrochemical and technology to ethical and emerging.

There are also solutions for lump sum investments and for regular monthly contributions.

But before you commit to a Stock and Shares ISA, you should also consider the potential of other types of ISA investment. With an IF ISA like that provided by RateSetter, your money remains as cash, which helps ensure that you can get at it if you need it, while the returns it earns can be equivalent to those of Stock and Shares ISAs.

You can open a RateSetter IF ISA now, or transfer your existing ISA funds.

Please note that tax treatment depends on individual circumstances and may be subject to change in the future. ISA rules apply. Capital at risk. No FSCS protection.

Learn more