What is more tax efficient, Cash ISAs or S&S ISAs?

Zuzi

I hope someone can help me better understand this.

Conscious that the annual 20K limit applies to the sum of money contributed to cash and S&S ISAs together, and being in the lucky position of having the 20K available, I have been wondering for a while whether to stick to just having Cash ISAs, or whether I should allocate some of my allowance to stocks and shares.

I have a GIA with Vanguard with some of their LS funds in, which has done quite well in the last 18 months, but I will admit that I don't know whether and how much capital gains tax is due on that, so I find it harder to understand the ISA benefits for a S&S ISA. Ideally I would want to be able to visualise it as a number or percentage, to know how much tax I can save. 

Since I became aware of ISAs and had enough income, I only funded cash ones, but I feel it may be time to put some stocks and shares/funds in the wrapper, too.

Does anyone have good examples or explanations / comparisons as to when which ISA type is more tax efficient? 
What factors would you take into account when deciding between cash and S&S?

Dazed_and_C0nfused

Zuzi said:

I hope someone can help me better understand this.

Conscious that the annual 20K limit applies to the sum of money contributed to cash and S&S ISAs together, and being in the lucky position of having the 20K available, I have been wondering for a while whether to stick to just having Cash ISAs, or whether I should allocate some of my allowance to stocks and shares.

I have a GIA with Vanguard with some of their LS funds in, which has done quite well in the last 18 months, but I will admit that I don't know whether and how much capital gains tax is due on that, so I find it harder to understand the ISA benefits for a S&S ISA. Ideally I would want to be able to visualise it as a number or percentage, to know how much tax I can save. 

Since I became aware of ISAs and had enough income, I only funded cash ones, but I feel it may be time to put some stocks and shares/funds in the wrapper, too.

Does anyone have good examples or explanations / comparisons as to when which ISA type is more tax efficient? 
What factors would you take into account when deciding between cash and S&S?

Do you want to save or invest?

That's the key question really.

p00hsticks

Both are equally efficient in terms of tax, as there is no tax to pay on either.
But that's not really the question to ask, as they are two fundamentally different products.  

Cash ISAs are for saving - basically savings account but with no tax to pay.
Your deposit is safe and you'll get a set amount of interest

S&S Isa's are for investing - you'll be using the money you invest to buy stocks and shares (usually in the form of funds that will cover many hundreds or thousands of companies) which can go up or down in price depending on a number of factors - so you risk losing money if you need to suddenly get it out in a hurry. 

Over the long term (a minimum of 5-10 years is usually recommended) and depending exactly on how you choose to invest, S&S Isas will typically outperform Cash ones. 

Zuzi

Thank you both - perhaps I didn't make it clear, I do understand the difference between saving and investing, I am already doing both (OK, perhaps heavy on the saving side at the moment), I was after some numerical examples specifically on the "tax saved" aspect -> what makes more (mathematical) sense to keep in the tax-free wrapper, cash or stocks?

I do realise that with stocks and shares there may be negative / no / low / high / really high gain, unlike with a Cash ISA where the interest rate is usually known, so the tax savings are probably hard to specify, but I was wondering whether anyone could make that clearer to me.

I am thinking of asking Vanguard to turn my GIA into an ISA, which will still leave me with some of the 24/25 contribution, and using that up adding to that S&S ISA. 

masonic

Your primary aim should be getting the best return on your capital within the parameters of your risk tolerance. Tax efficiency should be secondary. I'd prefer to earn a 5% return that is taxed at 40% if the tax-efficient option is 2.5% taxed at 0%. 

You wouldn't choose to hold different amounts in S&S because they are taxed differently. You would choose this based on your personal circumstances, objectives and risk tolerance.

If you hold both S&S and cash, as most people do, then the question becomes which to prioritise wrapping in an ISA. That depends on what benefit you get. You might get no, or little, benefit from using a cash ISA if you just hold an emergency fund of 3-6 months living expenses and all of the interest on that would fall within the personal savings allowance. If you have no other income, you can obviously earn a lot more interest without paying any tax. So use of a cash ISA would only make sense if the interest rate was better than you could get outside an ISA, which is highly unlikely (though right now cash ISA rates are unusually good, it usually isn't the case). If you hold more cash, then you need to weigh the short-term benefit of avoiding some annual income tax against the longer term benefits associated with sheltering investments (see below).

S&S investments is taxed differently than income from cash. Capital gains tax is charged when you dispose of an asset on all of the growth over the entire period you held it, at a rate determined when you sell. This means switching investments after holding for 20 years would generate a substantial gain in a single year that could easily lift you into higher tax rates. There used to be a more generous annual exempt amount before tax became payable, but this has all but disappeared, and doesn't help much if you are sitting on a large gain accumulated over decades. You could spread the gain out by making otherwise unnecessary investment trades, but this has its own cost, both in terms of money and effort.

There are benefits other than tax efficiency associated with S&S ISAs, the main one being that you don't need to keep records of your transactions and perform computations of your gains when they arise. You also don't need to worry about things like equalisation and excess reportable income or know how to calculate and account for these in your tax calculations. You will not need to provide any information to HMRC about your investment activities that occur within a S&S ISA. To me this is as important a benefit as the tax treatment.

Zuzi

Thank you @masonic for your comprehensive and detailed reply!

Sounds like I need to read up on capital gains tax a bit more. I think for this year, except for the new 5K cash that I have already put into the Trading 212 ISA, I will focus on switching my Vanguard funds from GIA to a S&S ISA.

Albermarle

Zuzi said:

Thank you @masonic for your comprehensive and detailed reply!

Sounds like I need to read up on capital gains tax a bit more. I think for this year, except for the new 5K cash that I have already put into the Trading 212 ISA, I will focus on switching my Vanguard funds from GIA to a S&S ISA.

For your average investor it is usually best to invest via a S&S ISA ( or pension) as it avoids a potential lot of admin, as the previous poster detailed.