This is not financial advice. | Contains affiliate links. I may receive an income from any investments you make through this article.
You’ve probably heard of ISAs, but most people either only think of them as a good way to save cash, or don’t realise what a great opportunity the government gives to each and every one of us. When you learn how great this thing is you’ll hopefully love it as much as I do.
What is an ISA?
ISA stands for ‘Individual Savings Account’, and is usually described as a ‘wrapper’. This is essentially a box that you put investments into that protects them from tax (or a wrapper that you put around your investments).
There are four types:
- Cash ISA: used for cash to keep your interest tax free
- Stocks and Shares ISA: used for stocks and shares
- Lifetime ISA (LISA): mostly used for stocks and shares; used for buying first homes and saving for retirement. There are extra costs to get money out for other purposes so be more careful before opening this one. Don’t ignore it though, under the right circumstances you get a 25% bonus to your money from the government!
- Innovative Finance ISA: originally used for peer to peer lending (people lending to other people), now gradually adding some crypto products
For now (starting out), the stocks and shares ISA is probably the one you want. Cash ISAs can be used for short term savings, but since we can get some interest tax free outside of ISAs their importance has gone down a bit. I’m also a big fan of LISAs, but they’re being replaced with a first-time buyer focused product from 2028 and there are rules you need to follow that make them a little more complicated.
How does the tax work and why is that so important?
Outside of an ISA, you have to pay Capital Gains tax on the growth of the investment, and dividend tax on any income you receive. This costs a lot of money and is a lot of admin, with endless calculations and tax returns. With investments that you’ve put inside an ISA, you can forget about that. No tax of either type, ever.
How great is that?
What can you put inside a Stocks and Shares ISA?
The great news is that you don’t need to just invest in UK companies, a Stocks and Shares ISA lets you invest in companies from around the world. (Side note: there were rumours the government might restrict ISAs to UK shares only, but thankfully this didn’t happen).
You can invest in:
- index funds (a collection of many companies)
- ETFs (a similar idea just structured differently)
- individual stocks (risky for beginners)
- Bonds, and other assets
The days of the 60/40 equities bonds split are behind us, as bonds just aren’t what they used to be. Most beginners these days pick a decent index fund or ETF and just keep buying more of it.
How much can you put in?
The limit of how much you can put in the ISA is £20k per year (so you can have millions of pounds in the pot as long as you only put in up to £20k per year). You can split this over different ISAs, so if you put £2k in a cash ISA you have £18k left that you can put in a Stocks and Shares ISA. It resets near the start of April, so your limit goes back up to £20k, but if you have an allowance left over, that is gone.
For most investors (which unfortunately includes me), £20k per person per year essentially means you can invest as much as you like, as you will struggle to save more from your paycheque. If you’re rich enough that you’re saying ‘oh no you can only save £20k a year’ then congratulations, you’re doing great.
Which platform should you use?
The platform is essentially the company that buys the shares for you, and looks after them for you. The age of having share certificates in a box in your attic are behind us.
All the big investment companies offer a stocks and shares ISA: Vanguard, Hargreaves Lansdown and AJ Bell are all well-established companies that I have personally had investments with.
There is pretty good competition that keeps fees well below what they used to be, so your biggest cost would be spending too long deciding and not doing any investing.
How do you open one?
It’s actually pretty simple to open a stocks and shares ISA, just visit one of the platforms mentioned above and fill in their online application. You’re usually done in about 15 minutes.
You will need your National Insurance Number, your bank details and some proof of identity.
Step by step guide
This is a bit of a speed run, if you want a full step by step guide see my (planned to be written soon) ‘opening an ISA’ article for the full details.
Choose a platform
I’ll do in depth reviews later, but for now pick a reputable company you know will be around for as long as you intend to be investing. Three I’ve used are:
- AJ Bell
- Hargreaves Lansdown
- Vanguard Investor
Choose your ISA type
For most cases this will be a Stocks and Shares ISA, but it depends on what your goals are:
- Stocks and Shares ISA for general investments medium to long term
- Cash ISA for short term savings
- LISA for saving for a first house or retirement
- Innovative Finance ISA for riskier investments (beginner investors will usually want to stay away from this one)
Verify your identity
You can often do this automatically through some personal details (National Insurance number), Date of Birth and Address) and the use of a credit reference agency e.g. Experian or Equifax.
In some cases you’ll need to upload some ID such as passport or driving licence, and occasionally proof of address such as a bank statement or utility bill.
Fund your account
Once you’ve opened your account, you’ll need some money in it. You’ll generally want to put some money in to start, then set up a regular payment. Most people connect up the regular payment so that it buys more of the investment you initially bought. A lot of platforms will reduce their fees for people that invest this way, and you can tap into the power of pound-cost averaging. It’s also the way I invest.
Choose an investment
You should pick what investment is the right one to fit how much risk you want to take, and how long you are investing for (need the money sooner = less risky investment).
My biggest investment (this is NOT a recommendation) is the Vanguard All-World ETF (VWRL), which is well diversified fund, spreading any investment over about 3,900 companies, including Apple, Microsoft and Amazon. Start small, and think carefully before investing in any individual stocks (i.e. a single company), as that is riskier than diversifying over a large fund.
Common questions about ISAs
Frequently asked questions that don’t need a whole section above, but are common enough to deserve to be here:
Can I have more than one type of stocks and Shares ISA?
They’ve recently changed the rules, so yes, now you can!
Can I take money out and put it back in again?
You can, but the allowance is how much you put in, so if you put take £10k out and then put it back in again, half your annual allowance is gone.
Is my money protected?
Not against bad investments. If you put 100% of your investment in a risky mining operation 1,000 miles from home and it goes bust, your money is gone.
If your investing platform goes bust and it’s FCA regulated (all the ones I mentioned above are), £85k per person per firm is protected. They are also supposed to keep your investments separate from their own money, so you should get all your money back if the platform goes bust. This is an extra protection. Most beginners are investing less than £85k, so you’re double protected.
Can I transfer money from one ISA to another?
Yes you can, but you need to ask the new ISA provider to do it for you instead of taking the money out yourself, otherwise it counts as using your allowance from this year.
Can I use previous years’ allowances?
Unfortunately not. If at the age of 40 you win the lottery and want to use a couple of decades worth of ISA allowance to hide it all from the taxman, your (considerable) luck has reached its limit. The limit is however £20k a year per person, so is very generous considering this is a nice thing the government are doing for us all.
Do I need an ISA?
If you’re serious about investing, for most people their ISA is the most important investment account outside of their work pension. If you’ve got one you’ve been neglecting, seriously consider putting a direct debit into it, if you don’t have one, seriously consider opening one now.
If you’re sold on getting an ISA, but still not sure what kind of investments to put in it yet, the next article is about one of the most powerful investments you can put in to your Stocks and Shares ISA.