How To Invest In An ISA With Stocks And Shares

Anthony Burgess (Pension & Investments)

Written by Anthony Burgess (Pension & Investments) on January 30, 2019

Updated January 31, 2019

Man on PC investing in shares

When you are saving for your future, you will want to find the best way to invest your money. Many individuals choose to use a stocks and shares ISA to invest their savings and hopefully see them grow over time. If you are considering investing in an ISA with stocks and shares, then it is important you understand what they are, how they work and how to invest your money.

This guide covers everything you need to know about stocks and shares ISAs, as well as some useful tips to help you get started.

What is a stocks and shares ISA?

If you are over 18 and living in the UK, then you will have an annual ISA allowance of £20,000 for the 2018/2019 tax year. Your ISA allowance can be used completely in stocks and shares, completely in cash, or as a split between the two.

A stocks and shares ISA operate quite differently to a cash ISA, which is a savings account that you will never have to pay tax on. When you choose a stocks and shares ISA, you are investing your money as opposed to saving it, and still making your investment tax efficient thanks to your ISA allowance. The name of a stocks and shares ISA can be slightly misleading, as you can use them to invest in more than just the stock market. You can invest in Open Ended Investment Companies (OEICs), investment trusts, unit trusts, government bonds/gilts or corporate bonds.

Essentially a stocks and shares ISA is not a type of investment in itself, but more like a tax-efficient wrapper for your investment. You will not need to pay any tax on the returns you make from a stocks and shares ISA; however, if you get a dividend from your investment, then you will still need to pay dividend tax.

If you have already used some of your ISA allowance in a cash ISA for this tax year, then you will need to deduct this from your overall ISA allowance to calculate how much you can invest in a stocks and shares ISA.

How does a stocks and shares ISA work?

You can use your £20,000 tax-free ISA allowance however you choose, which means you can pay all of it into a stocks and shares ISA if you want to or split it between a cash ISA as well. This yearly allowance runs for the tax year, and at the end of the tax year, it is lost. It is not possible to roll any leftover allowance to the following year.

You can invest in an ISA by paying in one lump sum or making ad hoc or regular contributions throughout the tax year. You are only able to pay into one stocks and shares ISA each tax year, but you are able to open a new one with a new provider every year if you want to.

Your ISA allowance is the amount you can pay in, not the total value of your investments. If you pay in the entire allowance to a stocks and shares ISA and then it falls in value, then you are not allowed to top it up again within the same tax year.

How to invest into an ISA with stocks and shares?

If you decide that investing in a stocks and shares ISA is a good option for you, then there are multiple options for how to invest your money:

  • Using a financial advisor: If you are inexperienced in investing, then it might be worthwhile seeking help from a financial advisor. Most will offer a free consultation, so you can look around and meet with a few before making a decision. Most advisors charge a fee for using their services, and this is often calculated as a percentage of your assets. It is not uncommon for financial advisors to only accept clients that are investing a certain amount of money, so if you are only investing a small amount, then you might have to shop around for an advisor that will accept you.
  • DIY investing: You can choose to invest in stocks and shares ISAs on your own, but there are a few decisions you will need to make. You will need to get the right mix of investments types in your ISA, and there are four key types to think about: equities, government bonds/ gilts, commercial property and cash. It is important to split your money into different assets in order to spread the risk.
  • Fund supermarkets: One of the easiest ways to invest in stocks and shares ISAs without financial advice is through a fund supermarket. They offer a range of different investment options so that you can get the right mix with one ISA provider. These fund supermarkets will allow you to monitor the performance of your investments in real time and switch them as you please.

The Financial Services Compensation Scheme should cover all stocks and shares ISAs. This means you could claim compensation of up to £50,000 if they go bust. However, you won’t be covered or compensated against poor performance in your investments.

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