logo

Everything you need to know about stocks and shares ISAs

By Antonia Medlicott

  • Published: April 30, 2024
  • Edited by: Clare West
  • Last Update: 2 weeks ago
check Fact Checked

Overview of stocks and shares ISAs


ISA stands for individual savings account. A stocks and shares ISA is an investment account, designed to help you grow your money by investing in the stock market free from any capital gains tax or UK income tax on the money you earn from your investments.

A stocks and shares ISA is also referred to as an investment ISA. Ideally, a stocks and shares ISA should be considered a long-term investment.

A stocks and shares ISA makes tax-efficient investing accessible to everybody. You can buy and sell assets, and manage your account from your mobile phone.

To be eligible for an ISA, you must meet all the following criteria:

  • You must be aged 18 or over.
  • From the start of the 2024/25 tax year, you will be at liberty to open more than one stocks and shares ISA in the same tax year.
  • You must not have exceeded the ISA annual limit of £20,000. The annual limit can be split between different types of ISA.
  • You must be a UK resident for tax purposes, or a civil servant working outside the UK, or their civil partner.

check

Reasons to use

  • Widely considered to be one of the most efficient ways to grow your money
  • An easy way to start investing
  • You get to keep more of your returns by avoiding tax
cross

Reasons to avoid

  • There are usually fees and charges associated with an ISA
  • You must be comfortable locking your money away for a set amount of time
  • The value of your investments can fall as well as grow

Stocks and shares ISA investment options


A stocks and shares ISA gives you access to different investable assets that give you the potential to grow your initial sum of money. These include:

  • Stocks and shares
  • Unit trusts
  • Investment trusts
  • Exchange-traded funds (ETFs)
  • Government or corporate bonds
  • Open-ended investment companies (OEICs)

It is possible to get help with choosing your assets. How much help you can access will largely depend on whether you select a do-it-yourself ISA, or a fully managed ISA.

Tips on how to make the most of your stocks and shares ISA


For those who are new to the world of stocks and shares ISAs – here are some tips and tricks to help you make the most of this investment opportunity.

Use your full allowance
Use it or lose it. Once the new tax year starts, any unused allowance is gone. Of course, this advice is only applicable to those with the cash to spare.

Be prepared to leave your money invested for at least 5 years
This is the recommended time to ride out any volatility in the stock market. This also gives your money the chance to benefit from the effects of compounding. Several studies have shown that money invested for the long term is likely to grow, whereas short-term investments are less likely to yield favourable returns.

Choose a strategy that aligns with your experience
Picking and choosing individual assets takes hours of research and analysis to be successful. If you are not prepared to take the time or don’t have the experience to interpret data, then you would be better off either choosing a fully managed investment service or, selecting a fund or ETF.

Manage your exposure to risk
A heavily diversified portfolio is the key to keeping your exposure to risk minimal. Make sure your portfolio has various sectors and regions represented so that should one sector or region start to lose value, your funds are protected by your exposure to other regions and sectors.

Invest on a regular basis to help smooth out market volatility
Investing on a regular basis is also known as drip feeding or dollar-cost averaging. This is a strategy whereby you invest a fixed amount of money into the stock market at regular intervals with the following benefits:

  • Helps to reduce the risk of investing a large lump sum at an unfavourable time
  • Helps control emotional decision-making in an attempt to time the market
  • Leads to consistent saving and investing habits
  • Helps smooth out the impact of market fluctuations over time
  • Helps to encourage a long-term focus

DIY versus fully managed investing


This is a crucial decision that you will need to make before you even select your provider. Do you want to manage your portfolio yourself, or rely on a professional to do it for you?

Before you make your decision let's look at some of the key differences:

DIY
This puts you in complete control. Decisions on how much you want to invest and what to invest in, as well as when to buy and sell your investment come down to you. There are some key benefits to investing in this way. These include:

  • Low cost: Often DIY investing sees a significant reduction in management fees which means more profits are retained within your portfolio.
  • Maximum control: You choose when, where, and how you invest.
  • Educational: If you are looking to enhance your investing skills and knowledge then this would be the way to go. However, it is worth bearing in mind that a lack of knowledge can result in poor investment decisions which could lead to a loss of your initial investment amount. If you do have limited knowledge then proceed with caution when DIY investing and always make sure you are fully diversified.

Fully managed

This is where you leave the professionals to make all the key decisions for you. The goal here is that you have a fully diversified portfolio that aligns with your risk profile. Fully managed investing can be done by humans, or automated through algorithm-driven software, and has some key benefits including:

  • Ease of use: This is a perfect solution for people with limited time or knowledge.
  • Broader exposure to global markets.
  • Unaffected by emotional decisions: Believe it or not, this is one of the most detrimental things to successful investing.
  • Automatic rebalancing: Portfolios are adjusted in line with changes in the marketplace.

DIY or fully managed – which is better for me?
If you are an experienced investor with plenty of time to study the markets, then DIY is probably a better option for you. However, if you would prefer to sit back and let professionals manage the entire process for you then fully managed would definitely be the way to go.

Best performing stocks and shares ISA


So you've decided to opt for a fully managed service and your decision regarding which provider to choose comes down to which provider has produced the best returns for the past five years.

Happily, we have done all the leg work for you and can confirm that Moneybox is currently leading the way on low-risk, medium-risk, and high-risk portfolios. However, it's important to always remember that past performance is not an indicator of future performance.

For DIY investors, the performance will come down to your individual decisions, so the performance of the fully managed portfolios won’t affect your decision.

Below is a snapshot of all the ready-made stocks and shares ISAs we recommend. It’s easy to see why Moneybox is our top recommendation but for more information on Moneybox, and why we feel it is leading the way for beginner investors, please refer to our ‘Best stocks and shares ISA’ page or our Moneybox review.

How fees impact your returns


You may think that the difference between paying 1% in fees and 0.25% in fees
is negligible, particularly when it comes to the impact this will have on your returns.

However, the opposite could not be more true.

This is down to the effects of compounding. Compounding means you don't just earn money on your original investment amount, but also on the returns made on that money each year. Fees can start to erode your original investment pot and the compounded gains over time, reducing your growth.

Let’s look at an example: Assuming you are paying 0.75% in annual charges, on an initial investment amount of £100,000, and you hold your investment for 30 years with an annual return of 5%, during that time you would have lost a total return of £83,629 due to fees.

Alternatives to a stocks and shares ISA


A stocks and shares ISA is not always the best option for everybody. Factors such as your financial goals and risk aversion can play a major role in the type of financial product that would suit you best.

Some of the other accounts to consider include:

Cash ISA
Better for those who need access to their cash. I would strongly recommend that you check interest rates before considering a cash ISA. At the time of writing, Moneybox has the leading Cash ISA rate.

Lifetime ISA
Better for those who are saving for a new home. A Lifetime ISA can only be used for the purchase of a new home or for retirement. However, this ISA comes with a very generous 25% bonus on all deposits up to £4,000 each year, which is automatically paid in by the government. Ensure you are familiar with the rules surrounding the Lifetime ISA. For more information on Lifetime ISAs click here, or alternatively, visit our Best Lifetime ISA page.

General Investment Account
Better for those not currently using their tax personal allowance. If you do not have an income from any other source then it is likely that you are not currently
using your personal allowance. If this is the case, then charges are often more favourable in a General Investment Account (GIA).

Junior ISA
Designed for those saving for children.

What is the personal allowance?


The personal allowance is the amount of income any individual can earn without incurring income tax. For the 2023 / 24 tax year, this stands at £12,570. Anything over and above this amount is subject to income tax including money earned from investments unless those investments are held within a stocks and shares ISA.

How your stocks and shares ISA grows over time


You may be considering whether a cash ISA or a stocks and shares ISA would be better for your situation. Of course, everyone is unique and you would have to assess your tolerance for risk and individual circumstances to make an informed decision. However, a study conducted by Moneyfarm using a hypothetical stocks and shares ISA revealed that a global equity portfolio would have seen an impressive return of 224.94% compared to a cash ISA return of 12.74% over the course of a decade.

Now, it's important to remember that historical performance is not an indication of future performance. However, for long-term investors this is a compelling reason to use a stocks and shares ISA to grow your money towards achieving a long-term goal.

Of course, some of this growth would depend on the performance of the assets held within the stocks and shares ISA. However, the effects of compounding on a long-term investment should not be dismissed.

How does compounding work? When you earn returns on an investment, those earnings don't just sit there; they get added to your initial investment. Over time, these earnings themselves start earning more money. It's like a snowball rolling downhill, getting bigger and bigger as it rolls.

So, the longer you leave your money invested, the more it grows, not just based on your initial amount but also on the returns it generates. Compounding can make your money grow substantially over time, helping you reach your financial goals faster.

FCA regulation


Every effort has been made to ensure that the stocks and shares ISAs recommended on this site are all FCA-regulated. The FCA (Financial Conduct Authority) is tasked with the responsibility of ensuring the investment platforms they authorise adhere to specific marketing and advertising rules about financial promotions, and that they conduct their business in accordance with regulatory standards.

It's important to note that while being regulated by the FCA can ensure you are protected against bad practices, there is no protection available for poorly performing investments. Therefore, it is always possible to lose some or all of your initial investment.

You should also check that the platform you are considering is offering cover by the Financial Services Compensation Scheme (FSCS). This ensures that should the platform become insolvent for any reason, your funds are protected
to the value of £85,000.

FAQs

When measuring the performance of a stocks and shares ISA, you need to look at the accounts that have access to a ready-made portfolio. Of the providers offering a ready-made portfolio, within a stocks and shares ISA, Moneybox has experienced the best returns for the past 5 years.

If you have used up your personal allowance and expect to gain from your investments, then a stocks and shares ISA can shield your gains from the taxman, resulting in you keeping more of what you have earned.

Note from the insiders:


If you have any further questions regarding stocks and shares ISAs, then please don't hesitate to reach out to us.