This article explains those key advantages and how you can make use of a stocks and shares ISA to grow your wealth faster!
Advantages of Stocks And Shares ISAs
When you open an ISA account in the UK, you have a choice whether to use it as a cash ISA or a stocks and shares ISA.
If you use it as a stocks and shares ISA, you can shelter the full ISA allowance for the tax year and invest it into a variety of different investments.
Our preference is to invest in company shares but you can also invest in bonds, unit trusts (mutual funds) and Exchange Traded Funds (ETFs), for example.
The long-term returns from stock market shares is much better than for cash.
The long-term return for the UK stock market is something like 9% compared to the cash ISA returns of 3% or less.
Which means that your savings and investments “pot” will grow three times faster because you are compounding your returns much faster.
That in itself is a good reason to take out a stocks and shares ISA if you don’t have an ISA of any kind already for this tax year.
It’s also a very good reason to invest the contents of your ISA into stocks and shares instead of leaving it sat in cash.
However, it’s not the biggest advantage.
The main advantage of a stocks and shares ISA and the reason why the UK Government restricts the amount you can save in an ISA each year is that they provide tax-free savings.
In other words, if you are investing in shares for the long-term, you really should be holding them inside a stocks and shares ISA wrapper to enjoy the tax advantages.
If you are a UK taxpayer, you will not pay income tax on the dividends that you receive on your stocks and shares held inside your stocks and shares ISA.
Furthermore, you will not pay capital gains tax on the investment growth resulting from rising share prices either.
Not only does this have the obvious advantage of reducing your tax bill and avoiding the complex job of calculating the capital gains on your share investments for your tax return but it also means that your investments will grow faster because they will compound at a higher percentage rate.
This is the main advantage of a stocks and shares ISA but it is not something that I see mentioned very often, if at all.
Compound interest is a subject all of its own so I’m not going to explain compound interest here.
However, if you’d like to learn more about it, then see this article where I explain the subject in more detail.
Stocks And Shares ISA Restrictions
Because of this tax-free aspect, it means that you need to leave your cash inside the ISA “wrapper” to retain the tax-free status of your money.
Once you withdraw cash from your ISA, the cash that you take out loses its tax-free status from that point on (any cash, stocks and shares left inside the ISA is/are unaffected) and putting it back into the ISA again constitutes a new ISA contribution and counts towards your ISA limit / allowance for that year.
See this article for more about the annual ISA limits / ISA allowances.
So if you want to invest cash into stocks and shares inside a stocks and shares ISA, you should think of it as money that you won’t need anytime soon and that you are putting away for a “rainy day.”
How To Invest In Shares In An ISA
At How To Invest In Shares, we are big fans of anything that enables taxes of any kind to be avoided legally.
Personally, I hold as many of my savings and investments in tax-efficient vehicles as possible and the ISA is one of these vehicles that I use.
One of the best ISAs on the market is available from Hargreaves Lansdown.
If you’d like to know more about how to use ISAs to shelter your savings and investments from tax, then why not access a copy of their free guide here?
Alternatively, if you’d like to know more about their stocks and shares ISA, you can access that here.
If you have any questions or comments about stocks and shares ISAs, stocks and shares ISA limits / allowances, etc. then please leave them below and I will answer…