Investing in a stocks and shares ISA is a great way of getting exposure to stock market growth while shielding your money from tax.
But with around 20 different stocks and shares ISA providers in the market, choosing the best platform isn’t always straightforward.
In this guide, we explain how stocks and shares ISAs work, how to compare performance and which providers come out top.
What is a Stocks and Shares ISA?
An ISA, or ‘individual savings account’, is a type of tax-free wrapper that lets you save money without paying any income tax or capital gains tax.
There are two main types of ISAs available in the UK: cash ISAs and stocks and shares ISAs.
Cash ISAs are similar to a traditional savings account except you don’t pay income tax on interest.
Stocks and shares ISAs – also known as an investment ISA – lets you invest money in a range of investments, including shares and bonds. You don’t pay income tax on dividends or capital gains tax on profits.
Stocks and shares ISAs are riskier than cash ISAs because your money is exposed to the stock market, which can sometimes be highly volatile.
Investing in a stocks and shares ISA should be viewed as a long-term investment because there’s a chance your money could fall in value.
By investing for the long term, you’ll give your money time to recover from any market dips.
Cash ISAs vs Stocks & Shares ISAs – Which is Best?
Cash ISAs are safer because you’re not exposed to investment risk. However, interest rates on cash ISAs are very low, so your money could be eroded by inflation and fall in value over time.
Other ISAs include innovative finance ISAs, which enable you to invest in peer-to-peer loans; junior ISAs, which are for people under age 18; and lifetime ISAs, which let you save for your first home and/or retirement.
The best ISA type for you will depend upon several things; your attitude to risk, how much you have to save and whether you prefer to earn consistent interest at a potentially lower rate.
You might prefer to save in a cash ISA for lower returns but also have the security of knowing that your deposit will not decrease in value.
Alternatively, if you’re willing to take on more risk, investing in stocks and shares with an investment ISA may mean you are exposed to more volatility in the short and medium-term but could earn larger returns in the long term.
How Many Stocks and Shares ISAs Can You Have?
You can own multiple stocks and shares ISAs, but you’re only allowed to pay into one of them each tax year.
There is an annual limit on how much money you can put into ISAs, which for the 2020/21 tax year is £20,000. This limit is split across all types of ISAs, so you could invest your whole £20,000 in a stocks and shares ISA or split it between a cash ISA and a stocks and shares ISA.
You can keep old ISA accounts from previous financial years open and continue to earn tax-free returns.
You can transfer ISAs from previous years into your new account, as long as your ISA provider allows ISA transfers.
This will consolidate your investments and keep everything in one place.
How to Transfer a Stocks and Shares ISA
To transfer your ISAs from previous years into a single account you will need to contact your provider to check if they allow this feature.
There’s normally a form to complete and you will need to share details of your old ISA accounts with your new provider to begin the transfer.
Can You Earn an Income from Stocks and Shares ISAs?
You can earn an income from a stocks and shares ISA by investing in shares or funds that pay dividends.
This type of income is unlikely to be regular because it depends on how well your investments are performing. Sometimes, after a fixed term, a company will reduce or stop paying dividends.
If you want to earn regular interest, you could consider investing in bonds, however, this can be difficult and expensive to do directly. It’s possible to invest in bond funds, but because they have a range of underlying investments, they don’t always provide a fixed income.
You won’t have to pay income tax on any income you receive in a stocks and shares ISA.
How to Compare Investment ISA Performance?
Comparing the performance of stocks and shares ISAs can be more difficult than comparing cash ISAs or other investment products.
A stocks and shares ISA doesn’t have a fixed rate or a target return – instead, its overall performance depends on how well each underlying investment performs.
If you invest in a ‘ready-made’ portfolio – where the ISA provider has selected investments for you – you’ll usually be able to find historical performance data on the provider’s website.
You can then try to compare this with similar ready-made portfolios at other ISA providers, although you need to ensure you’re comparing like with like.
If you choose investments yourself, your best bet is to look at reviews of the ISA provider and the fees it charges. Reviews will give you a good indication of how reliable the provider is and what its customer service is like.
Finding a provider with low charges is important because fees can eat into your investment returns over time. Some of the fees to look out for include the ‘platform’ or ‘custody’ fee, charges for buying and selling investments, and exit fees.
The cheapest ISA for you will depend on how much money you invest, what types of investments you buy and how often you trade.
A platform with a flat fee usually works out cheaper for people who invest a lot of money, whereas a percentage-based fee tends to be cheaper for smaller sums of money. If you trade frequently, look for a platform with low or no trading fees.
To make your life easier, Good Money Guide’s comparison table lists the top investment ISA providers, with information on what you can invest in, a breakdown of fees and comprehensive client reviews.
So, whether you’re a new or experienced investor, you can find the provider that best suits your needs.
Here is everything to consider when you compare stocks and shares ISAs.
How to Open Your Investment ISA and Invest in Stocks and Shares
Opening a stocks and shares ISA is very straightforward. Simply go to your chosen provider’s website and click ‘apply now’. You’ll need to provide the following to open your account;
- your contact details
- date of birth
- nationality (ISAs are available to UK residents only)
- National Insurance number
- proof of ID
- home address for the last three years.
The whole process should take about 10 minutes.
Once your account is live, you can add money.
You’ll need to log in and then select the ‘top-up’ or ‘single payment’ tab. Enter your debit card details and your money will appear in your account almost immediately.
It’s also possible to make regular payments into your account by setting up a direct debit from your bank account. You can’t use a credit card to pay money into a stocks and shares ISA.
Once the money is in your account, you can start investing.
Here's a complete guide how to invest in a stocks & shares ISA guide.
What Type of Stocks and Shares Can you Invest In?
A stocks and shares ISAs let you invest your money in a wide range of investments, including:
• Shares in companies listed on the UK stock market
• Corporate and government bonds
• Exchange-traded funds
• Investment trusts
• Funds (OEICs or ‘open-ended investment companies’)
• Overseas shares and corporate bonds that are listed on a recognised stock exchange
You can also invest your money in ethical investments. Some ISA providers publish a list of ethical funds to make the task of identifying them easier.
There are also limits, for example you cannot use an investment ISA to invest in MT4s.
How to Manage Your Investment ISA Account?
Using your online account is the easiest and cheapest way to manage your investment ISA. You can pay in money, buy and sell investments, and administer your account.
Some providers let you buy and sell investments by phone, but the trading fees tend to be higher. If your provider offers an app, you can manage your account on the go.
It’s completely up to you how often you invest money into your ISA. You can choose to make ad-hoc lump sum investments or set up a regular, monthly investment via direct debit.
How much money you pay in is also down to you, although you can’t invest more than £20,000 each tax year.
When the tax year ends, your ISA will remain open and all the money inside it will continue to be sheltered from tax. Once the new tax year starts, you can continue investing in your current ISA or, if you wish, open a stocks and shares ISA with a different provider. Any unused ISA allowance can’t be carried over to the new tax year.
Stocks and shares ISAs are designed to be long-term investments; however, you can withdraw money whenever you like. Most providers let you withdraw money for free, although you might need to pay a trading fee to sell some of your investments.
Usually, if you withdraw money and then reinvest it later in the same tax year, it will count towards and therefore use up your annual ISA allowance.
Who are the Best Stocks and Shares ISA Providers?
The best stocks and shares ISA providers are those who offer a wide range of investment options, low fees, a reliable website and great customer service.
Good Money Guide provides comprehensive reviews of the major stocks and shares ISA providers, along with client satisfaction ratings based on our survey of over 3,200 investors.
Hargreaves Lansdown has won multiple awards, is rated a five-star broker by our experts and scores a high customer satisfaction score of 83 out of 100. Although its fees are higher than some of its competitors, Hargreaves Lansdown offers one of the most well-established and comprehensive stocks and shares ISA platforms.
Check Hargreaves Lansdown Broker reviews.
IG is a top pick among experienced traders with a score of 92 out of 100, while Vanguard scores well for its low fees, transparency and reliability.
IG broker reviews
Investment ISA scams can be easy to fall for, here we explain more about how scammers use investment ISA scams to make money and how to spot them so you can avoid losing out.
What are the best stocks and shares ISAs for beginners?
If you’re a beginner investor, you might want to consider choosing a ‘managed’ investment ISA as opposed to a ‘self-select’ investment ISA.
With a managed ISA, experts manage your money and investments on your behalf, so you don’t need to worry about picking the right investments.
Often, the provider will have a range of ‘ready-made’ portfolios and you can pick the one that best matches your circumstances and risk profile.
As a beginner investor, it’s also worth choosing a provider with a simple interface and clear information.
Nutmeg and Wealthify are among the providers to consider if you’re just starting on your investment journey.
Our expert review of Nutmeg's Lifetime ISA can give you an insight into how easy they are to use.
Should You Choose a Self-select ISA?
A self-select ISA gives you complete control over choosing your investments and monitoring their performance.
With self select investment ISAs you are able to design an investment portfolio that’s completely tailored to your personal financial circumstances and risk tolerance.
However, as much as self-select ISAs can give experienced investors, with enough knowledge and confidence, the ability to hand pick the best shares and investments for their account. You’ll need to dedicate time to monitoring your investments’ performance and rebalancing your portfolio.
You’ll also need to keep an eye on costs. If you own a vast number of stocks that you trade frequently, the fees will soon add up.
Here's what an IFA would look for if they were investing in funds through an ISA.
Are Managed ISAs Best?
A managed ISA, on the other hand, usually has a set fee and so could work out cheaper. Managed ISAs are managed by professional investors so you are less likely to need to commit your own time into managing the accounts.
Weighing up how much time you have to spend managing your investments and your experience levels can help you decide if a self-select ISA is the best account for you.
What are the Advantages and Disadvantages of Stocks and Shares ISAs?
The biggest advantage of a stocks and shares ISA over conventional investing is you don’t have to pay income tax or capital gains tax. This means more of your money is going towards meeting your financial goals.
A cash ISA also shields your money from tax but, unlike a stocks and shares ISA, you don’t benefit from stock market growth. Money in a cash ISA could even lose value over time as it’s eroded by inflation.
Stocks and shares ISAs do have some disadvantages. These are;
- Your contributions are limited to the annual allowance of £20,000
- You can’t open more than one stocks and shares ISA in a tax year
- You can’t have a joint ISAs unlike investing through a ‘general investment account’, you can contribute and withdraw as much money as you like, hold it in joint names and have several accounts.
This is due to personalisation of the tax free allowance on ISA returns.
Stocks and shares ISAs are riskier than cash ISAs because your money is exposed to the stock market. So, although you could benefit from greater returns, you could also suffer losses.
Should You Consider Alternative Types of ISAs
There are lots of types of ISAs to suit different circumstances. If a stocks and shares ISA isn’t for you, or you want to hold another ISA alongside it, these are the ones to consider:
• Cash ISAs are similar to traditional savings accounts but you don’t pay income tax on interest.
• Lifetime ISAs are designed for saving for your first home and/or retirement. You can save up to £4,000 each tax year and the government adds a 25% bonus on top. You must be between 18 and 40 to open a lifetime ISA.
• Innovative finance ISAs let you invest in peer-to-peer loans. They’re aimed at experienced investors and you aren’t protected by the Financial Services Compensation Scheme if the provider collapses.
• Junior ISAs let you save up to £9,000 a year for a child under age 18. You can open a cash junior ISA and/or a stocks and shares junior ISA.
Stocks and shares ISA FAQs
Q. What is the difference between a share dealing account and a stocks and shares ISA?
A. A share dealing account is similar to a stocks and shares ISA in that it lets you invest in a wide range of investments, such as shares, bonds, funds and investment trusts. The main difference is your money isn’t shielded from income tax and capital gains tax. Some people use a share dealing account when they have used up their annual ISA allowance.
Q. How do I open an investment ISA online?
A. You can open an investment ISA online by going to your chosen provider’s website and clicking ‘apply now’. You’ll need to provide your contact details, date of birth, National Insurance number, proof of address and ID.
Q. Can I invest in ethical funds in an investment ISA?
A. Yes – investment ISAs let you invest in a wide range of funds, including ethical funds. Sometimes providers publish a list of their top ethical funds, which makes identifying them easier. Others, such as Wealthify, offer ready-made ethical portfolios, which let you invest in a range of ethical organisations through one plan.
