If you’ve got money to invest, you may be wondering about the differences between stocks and shares ISAs and general investment accounts, and which is better for you. We’ve rounded up the pros and cons to help you decide.
An ISA (individual savings account) is a tax-efficient way of saving, with an annual contribution limit of £20,000. Put simply, you usually don’t need to pay tax (of any kind) on returns you make on money you put into an ISA.
There are several different types of ISA. With a cash ISA, for example, your money is put into a cash savings account that earns interest. With a stocks and shares ISA, your contributions are invested into assets such as funds or, as the name suggests, stocks and shares. Your returns will depend on the performance of the investments in your stocks and shares ISA (plus any fees you may need to pay along the way).
As with a stocks and shares ISA, with a general investment account the money you put in is invested into funds, stocks and shares, bonds and other assets. Your returns will depend on the performance of your investments (after any fees are deducted). Any profit you make between buying and selling investments may be subject to capital gains tax. Depending on the nature of your investments, other forms of tax may also apply (such as dividend tax on dividends and income tax on bond interest). Unlike a stocks and shares ISA, there’s no limit on how much you can pay into a general investment account each year.
There are a number of similarities between stocks and shares ISAs and general investment accounts, as well as number of differences (which we explain below). Here are some key similarities:
|Stocks and shares ISA||General investment account|
|What are the tax benefits?||Returns made within a stocks and shares ISA are free of tax (including capital gains tax, dividend tax and income tax).||No tax benefits. Depending on the nature of your investments, profits and/or returns may be subject to capital gains tax, dividend tax or income tax.|
|What is the annual savings limit?||£20,000 across all types of ISA. You cannot contribute above this level.||No limit.|
|How many accounts can you have?||1 per tax year. You can also hold 1 cash ISA, 1 innovative finance ISA and 1 lifetime ISA (aged 18–39 only).||As many as you wish.|
|Can you have a joint account?||No. Only 1 person can access and save into an ISA.||Potentially, depending on the provider and the specific account.|
It’s not really a case of better or worse. They’re just different.
Stocks and shares ISAs have one obvious benefit. With a general investment account, you’ll pay tax on any returns that exceed your annual allowances for interest, dividends or capital gains. With an ISA, all returns are tax-free.
However, there’s no annual limit to general investment accounts. You can invest as much as you like without worrying about busting any allowances. And you can open and pay into as many general investment accounts as you like. You can only open and pay into one stocks and shares ISA per tax year.
ISAs and general investment accounts both have pros and cons. Fortunately, you don’t have to choose between one or the other. There’s nothing stopping you holding both at the same time. As a general rule, we’d recommend maxing out your annual ISA allowance first because of the tax benefits. But, if you’ve done so, a general investment account will let you continue to grow your portfolio with no restrictions.
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
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