If you are a UK resident and aged 18 or over, you can invest up to £20,000 (for the tax year 2021-2022) in an investment ISA (individual savings account). Investment ISAs are also often referred to as stocks and shares ISA. Innovative finance ISAs are another available option.
It’s easy to see why many people think ISAs are complicated; the names alone sound alien. Because of this, the majority of people either let their ISA allowance go unforgotten or take the easy route and simply open a cash ISA with their bank.
We’ve written this guide to dispel the mystery and explain why investment ISAs might be a good way for you to invest your money for growth and reap the benefits of enjoying tax-free savings and investments forever.
Read on or click a link to jump straight to the information you want:
An investment ISA is a tax-efficient way to invest. Investments usually come with potential tax charges but by using an ISA wrapper for your investments you can buy, hold or sell your investment free of tax. Every UK resident has an annual ISA allowance and can save up to £20,000 (2021/2022 tax year) in an ISA investment.
How do investment ISAs work?
You can invest your funds in the same way you would make any investment but, inside an ISA wrapper, you gain the advantage of not paying tax on any investment growth or dividends. On withdrawing your money it remains free from income and capital gains tax, no matter how long you were invested or how much growth you have seen.
You can use an investment ISA to invest in:
- Individual stocks and shares: This is where you invest directly into companies trading on stock markets around the world, usually through a stockbroker
- Investment trusts: Pooled funds which invest in assets, eg. equities or property. Listed as companies on the London Stock Exchange, they are traded like shares by a fund manager
- Unit trusts: A pooled investment fund managed by a professional fund manager. The fund manager invests money from investors into a mix of investments
- Open-ended investment companies (OEICs): Pooled investment funds, managed by a fund manager who buys shares, bonds, property or a mix of other investments
- Exchange-traded funds: An investment fund made up of a combination of different assets traded on the open stock market, designed to replicate the stock index it’s tracking
- Corporate bonds: Companies wanting to raise money issue these as a way to raise money from investors
- Government bonds: Issued by the government, they usually have a fixed term and pay regular interest which can either be reinvested or paid out as income, at the end of the term your money will be repaid in full
Another, less well-known, alternative is to use your allowance to invest in innovative finance, which includes peer-to-peer loans and ‘crowdfunding debentures’ which is when you invest in a business by buying its debt. Although this particular choice would not be for the faint of heart and you might need more knowledge about investing in companies to make an investment of this nature.
Some people like the idea of saving a regular, affordable sum every month to spread the cost, and not lose the opportunity of making potentially high savings entirely tax free.
Many investment ISAs accept funds through regular monthly payments, so if you want to save your ISA allowance into an investment fund but don’t want to pay the whole available allowance in one go, you could opt to save up to save £1,666 without breaking the £20,000 annual limit (for 2021/2022).
You don’t have to use your full allowance every year, the limit is simply to ensure individuals don’t save over that amount, but there is nothing to stop you saving less.
Your ISA will remain invested, even after the tax year ends. Your savings remain tax-free for as long as the money is invested and when you take the money, you will not have to pay tax on any money you have made on the investment.
If you’re considering the advantages of using an investment for your ISA allowance this year, or next, talk to one of the investment experts we work with, make an enquiry for a free, no-obligation chat and we’ll match you with an expert who will be happy to answer your questions and help you understand the kind of investment which might suit you, taking all your circumstances into account.
All the experts we work with are independent financial advisors with access to investment houses and institutions who invest funds around the world.
The maximum amount of money you can invest in the tax year 2021 to 2022 is £20,000.
Every UK resident over the age of 16 has one ISA allowance to use each year. If you are 18 or over you can invest in a stocks and shares ISA. If you decide to put the full annual allowance into an investment ISA, that is the only one you can take out. However, it is possible to split your allowance across multiple types of ISA.
For example, you could split your ISA allowance between a cash ISA and an Investment ISA – you could put 50% into a cash ISA and the other 50% into an investment ISA.
Or you might decide to split your ISA allowance 3-ways: 10,000 in a cash ISA, £6,000 in an investment ISA and £4,000 in a Lifetime Allowance ISA or LISA (£4,000 is the current maximum amount you can put into a LISA, for the tax year 2019-2020).
What if I accidentally funded two ISAs in the same year?
While you can split your ISA allowance between two different types of ISA, if you inadvertently invest money into two ISAs of the same type in the same tax year HMRC have an advice line you can call for help.
The number is 0300 200 3300. It’s open 8am-8pm Monday to Friday and until 4pm on a Saturday.
While it may be tempting to fix it without calling attention to the situation, if you try to resolve the problem yourself you may make things worse if you chose to close the wrong ISA.
The same advice line can be used if you accidentally invest too much into your ISA, therefore breaching the rules of how much you can save tax-free in any one year.
HMRC will take the details of which ISA had the payment which took you over the allowable limit and then reclaim the money, and take any tax owed.
While some investment ISAs charge an upfront fee to invest, there are many which only charge an annual management fee. Unlike cash ISAs which are basically tax free savings accounts, when you invest in an investment ISA your money is managed by bankers, fund managers or stockbrokers who charge for their investment and asset management expertise.
Your investment ISA will charge a percentage of the funds you invest. Some investment houses set their charges on a sliding scale so the more you invest, the lower the charges you may face.
This can be particularly useful if you invest the full allowance for more than one tax year into the same fund, although you may want to take advice about how you can use your ISA allowance to the best advantage by spreading your investment across a variety of funds.
The most important consideration when it comes to an investment ISA is where to invest your money. If you invest your money in a fund which performs poorly, the annual fee can eventually eat away at the money you have invested.
If you don’t have previous investment experience but want to use your ISA allowance to make a wise investment, instead of holding the money in cash, you should seek advice. An experienced investment advisor can help you determine the kind of investment which might best suit your needs and suggest an investment strategy to suit short or long-term goals.
The expert investment advisors we work with can help you plan out an investment strategy that will serve you best. Make an enquiry for a free, no-obligation chat.
We’ll match you with an expert who will assess your attitude to risk and help you understand the options you may wish to consider.
All the advisors we work with are regulated by The Financial Conduct Authority, so you can rest assured you’ll always be dealing with a highly trained financial expert who adheres to strict rules of conduct.
Many people want to find out more about investment ISAs because having a way to invest and earn income growth free of any tax, over both the long and short term, is highly appealing.
These are some of the questions we hear most often from our customers…
How safe are investment ISAs?
Investment ISAs are naturally riskier than cash ISAs, but the level of risk depends on how and where you invest. If you buy shares for one single company, this can be seen as a high-risk strategy. There are many investment houses that offer a range of unit trust investment funds you can choose from which can be used to help spread your risk.
Make an enquiry and talk to one of the investment experts we work with for advice on what sort of investment ISA might suit your own appetite for risk.
What are the safest?
Some unit trust investment ISAs are designed specifically for more risk averse investors. However, if you’re highly risk averse, investment ISAs should probably be avoided altogether. Your safest option is a high-interest cash ISA. If you want to avoid risk while still benefiting from the best returns, you could consider a fixed term ISA.
Fixed term ISAs often pay a higher rate of interest than you might get with a variable, easy access cash ISA. However, you will need to be sure you’re happy to tie your money up for a set period of time as this kind of offering can come with strict rules regarding the period you will have to leave your money in the ISA account.
If you needed to withdraw your money before the set period was over, you could end up forfeiting the interest or face having to pay an early exit penalty.
What makes an investment ISA low risk?
One way to make your investment low risk is to spread your investment by using investment trusts or unit trusts. Using this kind of fund means you’re investing your money across a range of funds, rather than putting all your eggs in one basket, because they offer diversification across a range of assets and investment strategies.
To find out what kind of funds might be good for you to consider for your ISA investment, make an enquiry and talk to one of the investment experts we work with.
All the experts we work with are independent financial advisors with knowledge of and access to funds from all the investment houses across the UK.
Are investment ISAs protected by the Financial Services Compensation Scheme (FSCS)?
Yes, investment ISAs are protected by the FSCS. This won’t protect you against poor performing funds but, should the investment provider fail, you can claim up to £85,000. This is another good reason to ensure you seek expert independent advice and make sure you spread your investments across a range of providers and products.
Most fund managers and ISA managers are also regulated by the Financial Conduct Authority which offers you another layer of protection.
All the expert advisors we work with are highly trained and regulated so you can rest assured you’re in safe hands when it comes to getting the advice you need to make an investment you’re confident in.
Make an enquiry to get started.
Do investment ISAs work?
Yes, investment ISAs work well for some people because the tax advantages can mean huge tax savings on the growth gained over the long term. Some people use investment ISAs as a way to save for their retirement income, in preference to a personal pension which can be complicated and tie your money up with strict rules and regulations.
How well an investment ISA works will depend on how and where you invest your money. For the best rates and returns on your money you need to find an investment which delivers over the medium to long term.
The investment experts we work with will help you find the right investment for your needs and appetite for risk. Make an enquiry to get started.
Are all investment ISAs tax-free?
Yes, all investment ISAs are tax-free by design. When you invest money any interest earned or investment growth you gain within the ISA investment is free of tax.
Are there ethical funds for my investment ISA?
Ethical funds are big business for many investment providers. Ethical funds allocate investments to companies which are designed to make a positive impact on society. These funds make a determined effort to avoid investing in companies thought to do harm to society and the environment and tend to operate in a way that is truly sustainable.
To find an ethical fund which might be the right fit for your ISA investment, talk to one of the experts we work with…
We work with expert investment advisors experienced in advising clients about a whole range of investments.
If you would like to talk to someone about using your ISA allowance to meet specific investment goals or simply want to find a way to benefit by investing some of it, call 0808 189 0463 or make an enquiry for a free, no-obligation chat. All the experts we work with are independent financial advisors with access to all the investment providers in the UK.
They will be able to answer all your questions and help create an investment strategy to meet your long term financial goals.