How Does a Stocks and Shares ISA Work?

If you’ve been thinking about investment in a stocks and shares ISA as opposed to a cash ISA, here are a few facts you should keep in mind before you make any decisions.

A cash ISA is a tax-free savings account which allows you to save a certain amount each year without having to pay any tax on the profit at all. A stocks and shares ISA , on the other hand, is a more riskier way of saving as you can lose money as well as making it. With this form of ISA, you put your money into a range of different investments including government and corporate bonds and unit trusts, and the amount of money you make will depend on how your investments perform on the stock market.

Unlike a cash ISA, you will have to pay tax on the profit from a stocks ISA if you have bought share based investments, for example, unit trusts. Some people who are paying the higher rate of tax use stocks and shares ISA in order to save on their tax bill, but most people won’t actually save money this way.

On the other hand, if you use your ISA to invest in interest bearing investments – a corporate bond for example, then the interest you earn is tax-free regardless of the tax band you’re in.

With providers like Sippdeal, you will have to pay some administration charges with a stocks and shares ISA, and this fee is used to cover the commission owed to financial advisers and to pay fund managers. However the amount charged won’t be any higher than the usual administration fee for an investment portfolio.

How much can I save each year?

The current allowance for ISAs in a tax year is £11,280. You can choose to invest a maximum of £5,640 in a cash ISA and invest the rest in a stocks and shares ISA or you can invest the full amount in a stocks and shares ISA only – it’s entirely up to you. If you want to hedge your bets it might be an idea to split the allowance, so you are reducing the risk. However, if you’d prefer to take a punt by investing all your savings in a stocks and shares ISA then just be sure you have a good investment plan and have done your research. If you can get some independent advice from a financial expert then all the better.