Stocks & Shares Isa - confused

crm974

Hi,
Im just trying to get my head round Stocks & Shares ISA, but I’m a little confused.  How exactly do they work?  If I were to put £50k into a broker account and made £5k. Does it mean that I could pay in £5k to my stocks and shares isa and not get taxed?  If that’s the case what’s to stop me paying the £5k into a standard cash isa or do they need proof of where the 5k came from?  I think I’m totally missing something here so if anyone can shed any light on how they work it would be much appreciated.

Thanks.

grumiofoundation

https://www.moneysavingexpert.com/savings/stocks-shares-isas/

You are confusing now ISAs work. The allowance refers to money you pay in. 

You can pay £20,000 per year, of new money, across all types of ISA (Stocks and shares, cash (inc HTB), innovative Finance and lifetime). Can only contribute new money to one of each type each year. 

Any money you pay into ISA is tax free. So for stocks and shares any gains (or losses) you make, however high, are not subject to any taxes. 

If you invest outside an ISA gains are subject to CGT, dividends subject to tax. 

crm974

Hi thanks for coming back to me.

So is the main difference between a standard cash isa and stocks and shares isa that with a standard isa you make tax free interest and with a stocks and shares isa you just don’t pay any tax on the money you put into it?

grumiofoundation

There isn't really a difference - an ISA is just a 'tax wrapper' for whatever is inside it.

Money goes in. Any gains, whether interest or stocks going up are free of tax. 

crm974

Hi sorry I’m still not getting this. I understand cash isa’s.  If I put my money in then I get paid tax free interest, but if I’m investing (say £5k) then I’m giving my £5k to the broker and not putting it into an ISA.  maybe In a few years I’ll cash in my initial 5k and any extra I’ve made.   Is the stocks and shares isa to be used at that point I.e once I’ve cashed in my shares & profit (if any) and then I pay in my initial investment + my profit (if any) to my stocks and shares isa?

Thanks.

grumiofoundation

crm974 said:

Hi sorry I’m still not getting this. I understand cash isa’s.  If I put my money in then I get paid tax free interest, but if I’m investing (say £5k) then I’m giving my £5k to the broker and not putting it into an ISA.  maybe In a few years I’ll cash in my initial 5k and any extra I’ve made.   Is the stocks and shares isa to be used at that point I.e once I’ve cashed in my shares & profit (if any) and then I pay in my initial investment + my profit (if any) to my stocks and shares isa?

Thanks.

In your above example you aren't investing using a stocks and shares ISA - therefore gains are subject to tax.

It works the same as a cash ISA. 

You pay say £20,000 into Stocks and Shares ISA - whichever provider.
Gets invested in whatever you choose.
Goes up in value - now £40,000
You can withdraw all or part of this at any point all gains tax free.

crm974

Ah I see so the ISA provider is essentially the broker??

dunstonh

crm974 said:

Ah I see so the ISA provider is essentially the broker??

They can be the broker.  Or they can be the provider. Not all providers offer brokerage services.   Mainly as most investors do not use brokerage services.

Albermarle

Say for example you go to a well know investments platform like Hargreaves Landsdown and you want buy £10K of fund X.
You can buy the fund via their general investment account and hold it there . Any capital gains or dividends received from fund x are potentially liable to CGT and dividend tax if they were big enough .
If you instead had opened a S&S ISA with them and bought and held the same £10K of fund x in the ISA, then any gains or dividends are sheltered from tax . The disadvantage of the ISA is that you are limited to a max £20K new money each tax year , but there are no limits to how large the money in the ISA will grow to. 
Also some providers may charge a little more for an ISA than a general investment account due to the extra admin for them .
For smaller/medium sized investors the ISA route is much better as it avoids tax on gains and there is no need to inform HMRC of any details .