A stocks & shares ISA is not an investment in itself, it is simply an investment ‘wrapper’ which hold funds and shares of an investor’s choice in a tax-efficient manner. ISA stands for Individual Savings Account and the current allowance is £15,240 for the financial year 2016/2017. This allowance can be fully invested into a stocks & shares ISA or cash ISA – or a mixture of both in any proportion.
While a cash ISA will offer a steady return, a stocks & shares ISA is more suited to those looking to take greater risk in pursuit of higher returns.
The main advantages of a stocks and & shares ISA are:
- Potential higher returns than a cash ISA (particularly in the current low interest rate environment) if the underlying assets perform well
- No capital gains tax on any profits made by selling assets or ‘cashing in’ on assets within the ISA
Apart from dividend income charged at 10% – the rest of the income in this type of ISA is tax free.
UK residents aged 18 and over can apply to open a stocks & shares ISA. These type of ISAs can be opened at banks, online execution only brokers (who typically offer a greater choice of possible investments to hold) as well as through a financial adviser.
It is worth noting that an investor can only pay into one stocks and shares ISA and one cash ISA per tax year, but can open a new stocks & shares ISA and cash ISA with a different provider each year.