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Do you pay tax on a Stocks and Shares ISA?

When it comes to saving money, one of the best vehicles on the market today here in the UK is the Individual Savings Account or ISA. Here in this article, we are going to be looking into the Stocks and Shares ISA tax benefits.

To find out why ISAs, in general, are so popular and so often recommended, you need to understand how they work and the tax implications that come with them. Let’s start with what they are; then, we can move onto taxes from there.

What is an ISA?

An ISA, or Individual Savings Account, is a savings vehicle that is constructed in such a way that you ideally don’t pay tax on your returns. There is, however, one restriction. The amount of cash you are allowed to save or invest in an ISA in any one tax year – your individual annual ISA allowance – is set at £20,000 per annum. This figure has remained unchanged since 2017.

You might like to think of an ISA as a protective box – financial professionals refer to them as “wrappers”. Anything inside these “wrappers” is protected from HMRC. There are two base types of ISA – the Cash ISA and the Stocks and Shares ISA.

How does an ISA Work?

If you are aged 16 or over and you are resident here in the UK, you are entitled to save money into one form of ISA every year. The amount of money the taxman will allow you to save is known as your ISA allowance, and it is set at £20,000 per tax year.

Once inside an ISA “wrapper,” your cash cannot be taxed. It doesn’t matter how long it stays in there. Both the Cash and Stocks and Shares ISA tax positions are the same. The taxman cannot touch them.

The various types of ISAs

As we mentioned above, there are two main types of ISA, the Cash ISA and the Stocks and Shares ISA. There are some other variations, however, and the complete list of ISAs looks like this:

  • Cash ISA
  • Stocks and Shares ISA
  • Innovative Finance ISA
  • Junior ISA
  • Lifetime ISA
  • Investment or Stocks and Shares ISA

For those who aren’t particularly risk-averse, the Stocks and Shares ISA tax benefits, along with the potential for the strong returns on your investment, make this type of ISA a shrewd investment tool.

Under what circumstances would a Stocks and Shares ISA be suitable for you?

Different people have different aspirations in terms of their savings plans. One type of ISA may be more suitable than another depending on the person’s circumstances. So, let’s take a look at the circumstances under which a Stocks and Shares ISA might be an attractive proposition for you.

  • If you are happy to take up a long term, tax-free investment portfolio
  • You are not expecting immediate access to your money, as accessibility will depend on the selling of stocks and shares.
  • You have not used your total annual ISA allowance for the current tax year. Please bear in mind that if you don’t use the full extent of your ISA allowance, you cannot take it forward into the next tax year.
  • You are comfortable with the realisation that your investments can go up or down, meaning that it is possible you could get back less than you invested.

Claiming back tax

Some types of savings products pay tax-free interest regardless of your income or any other savings interest you receive. Having said that, the majority of savers no longer have to save into an ISA to earn tax-free interest because of the introduction of the personal savings allowance.

The individual tax allowance for the current tax year is £20,000, which means that you can still save tax-free even where you are an additional rate taxpayer.

If you suspect that you have paid more tax than you should have on your savings, you will have to complete an R40 form which you can download from the GOV.UK website.

Fee charges on Stocks and Shares ISAs 

Stocks and Shares ISAs often outperform other forms of saving – including Cash ISAs – over the long term. However, although the difference in terms of interest rates can be significant, it may not be huge. If you’re not careful with how your stocks and shares ISA is set up, the fees that you are charged could make the proposition less attractive by eating into your profits.

What are the tax advantages of Stocks and Shares ISAs?

When all is said and done, the tax advantages of Stocks and Shares ISAs are significant. First of all, you have your £20,000 per annum ISA allowance, which is tax-free. Then, the growth of your investments will not be subject to capital gains tax, something which also applies to any withdrawals you might make.

Compound tax-free returns

A Stocks and Shares ISA is a tax wrapper that has been designed to protect your investments from both income tax and capital gains tax. Over a period of time, this can have a significant effect. If money is left in an ISA, it will be able to take advantage of the wonders of compound interest returns. In other words, the interest is added onto the investment, which grows and attracts even more interest year-on-year.

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Outmanoeuvring inflation

The spectre of inflation is a constant worry. It is ever-present, and unless your savings are protected, it can erode their value over time. It is certainly something to worry about with a Cash ISA because interest rates are currently not that much higher than the rate of inflation. 

The Bank of England’s inflation calculator indicates that inflation has reached an average of 2.7% per annum. Compare this to the fact that interest rates on Cash ISAs are generally below 2%, and it is a clear indicator that in several years, the real value of your savings could quite easily have shrunk.

This is when a Stocks and Shares ISA can come into its own, because the interest rates are generally much higher and regularly outperform inflation, meaning that in real terms, your money can be worth even more over the long term. However, you have to bear in mind that with Stocks and Shares ISAs, investment values can go down as well as up.

 

To help you to understand the Stocks and Shares ISA tax implications, we’ve created a short FAQ section.

Do you pay tax on Stocks and Shares ISA accounts?

Providing you stick within your personal annual ISA allowance of £20,000, your contributions will be completely tax-free. You can spread your contributions across all variants of ISAs to a total of £20,000 either individually or across all five types. However, you should bear in mind that the maximum annual allowance with a junior ISA is £4,000.

The individual investor is responsible for ensuring that he or she does not exceed the annual ISA allowance in any one tax year. If you think you may have done this accidentally, you should contact both your ISA provider and HM Revenue and Customs. None of the overpayments will be entitled to any tax relief, and HMRC could penalise you.

Is Capital Gains Tax payable on stocks and shares ISA investment growth?

The situation with Stocks and Shares ISA capital gains tax is quite clear. You will not pay any tax on the growth of your investment or any returns or interest. You will not pay tax on any dividends in your post portfolio, nor will you pay any capital gains tax on any profits your Stocks and Shares ISA makes.

Do I pay tax on Stocks and Shares ISA withdrawals?

Withdrawing money from a Stocks and Shares ISA tax-free wrapper means that the money loses its tax-free status. Should you withdraw money from an ISA into which you’ve subscribed during the current tax year, the balance of your ISA allowance won’t be adjusted. What this means is that if you add those funds back in at a later date, they can still count towards your overall annual ISA allowance.

What about Stocks and Shares ISA tax on dividends?

Regardless of the size of any dividends you receive from the stocks and shares in your Investment ISA,

you will not pay any tax.

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