A stocks & shares ISA is a regulated type of stockbroker account. It can be used to hold cash, shares and other asset classes.

The major draw of a stocks & shares ISA is the tax protection it offers. Any income earned in a stocks & shares ISA is exempt from income tax. The same applies to capital gains which are made by selling investments at a profit. 

As well as tax protection, stocks & shares ISAs keep the paperwork simple too. That’s because you don’t even have to declare income and capital gains on your personal tax return if they occur within an ISA.

There are strict limits on how much cash you can deposit into a stocks & shares ISA each tax year. The limit for the tax year ending 5 April 2021 is £20,000. 

It was confirmed in the 2021 Spring Budget that £20,000 will also be the cap on deposits for the 2021/22 tax year also. 

The limit resets with the end of each tax year, and you can use this to your advantage. If you have £40,000 to deposit in a stocks & shares ISA, you could deposit:

£20,000 on the 5 April 2021 and;

£20,000 on the 6 April 2021

This would technically use the full allowance of both tax years, yet allow you to deposit a large lump sum in the same week. This example assumes that you have not used any of the 20/21 ISA allowance.

Be aware that if you have already deposited cash into other ISAs in the current tax year, such as:

• Cash ISA
• Lifetime ISA
• Innovative finance ISA
• Junior ISA

Then these will reduce the amount you can contribute to your stocks & shares ISA. You can never deposit more than the annual limit in total across all of your ISA accounts.

Stocks and shares ISAs can hold stocks and shares, as the name suggests. But they can also hold: 

Funds. These come in many forms, such as:

• Unit trusts
• Investment trusts
• Exchange-traded Funds (or ‘ETFs’)
• OEICs (Open Ended Investment Companies).

Bonds. These could include:

• Corporate bonds
• Government bonds

Cash, including foreign currencies. Your deposit will initially arrive as cash, unless you have specifically transferred in investments from another stocks & shares ISA provider. 

Although stocks & shares ISAs can hold cash, they’re not intended as a savings account. That's because they tend to pay uncompetitive rates of interest on cash deposits. 

In fact, many stocks & shares ISAs pay 0% interest on any cash deposits. It’s often more practical to open a separate cash ISA or savings account to earn a better rate of interest on any significant balances.

Here is a non-exhaustive list of investments which cannot be held in a stocks & shares ISA: 

• Direct investments in a private, unlisted business. (Think of the investments made by the Dragons on the BBC series The Dragons Den).
• Direct investments in land & property.

• Loans to private individuals. It may be possible to hold these types of  ‘peer to peer’ loans within an innovative finance ISA instead. 
• Cryptocurrencies
• Commodities, such as gold bullion, silver bullion and oil. 
• Derivatives or Contracts for Difference (CFDs)

Like most stockbroker accounts, stocks & shares ISAs charge a combination of fees. These include:

Trading fees or commission. This is a transaction fee paid each time you buy or sell units of an investment within your account.

Platform fees or account charges. This is an annual, quarterly or monthly fee deducted from your account. These can be calculated as a percentage of your assets, or as a flat monthly fee. This charge can sometimes have a minimum and maximum value, to moderate the charges for very small or very large accounts. 

Registration fees are uncommon, but sometimes exist. This is a one-time fee to cover the administrative effort of setting up a stocks & shares ISA. 

Currency conversion fees. You may pay a commission or fixed charge each time you convert cash from one currency into another in your account. As an example, this may occur if a European company you own has paid a dividend in Euros, which you wish to use to buy a UK company which is listed in Pound Sterling. 

Exit fees. A stocks & shares ISA may charge a fee to transfer investments directly out of the account to another provider. If these apply, they will be charged per investment. Some providers don’t charge anything for this service, so it’s worth looking out for in the small print. 

Overall, the fees which will probably have the most impact on your investment returns are the trading fees and platform fees. It’s helpful to measure the combined cost of these when comparing stocks & shares ISAs. That’s why we highlight them in the comparison table above.

You may be wondering - why do investment platforms offer a non-ISA version of their investment accounts? Isn’t it a no-brainer to open the stocks & shares ISA every time?

The answer is: Yes, a stocks and shares ISA is usually the efficient choice. It provides a high level of tax protection, and usually carries similar fees to other accounts. Therefore, it follows that investments will grow in value faster in a stocks & shares ISA compared to a standard investment account. 

However, there are several scenarios where an ISA isn’t always the best option: 

• If you have already contributed £20,000 to a stocks & shares ISA in the current tax year. 
• If the general account has lower fees, and you don’t place much value on the tax benefits of the ISA, for example if you don’t expect to pay much tax on income anyway. 
• If you don’t qualify for a stocks & shares ISA. For example, if you are not a resident of the United Kingdom.

The history of stocks & shares ISAs is in fact a relatively short history. The earliest ancestor of the stocks & shares ISA is the PEP (Personal Equity Plan) which was launched in 1987 with an annual allowance of just £2,400.

Since then, the account has been rebranded not once, but twice. Their first name change called them 'Maxi-ISAs', before eventually landing on the simple 'stocks & shares ISA' name in 2006. 

The allowance of the stocks & shares ISA has also been generously increased over successive Budget Statements up to the current limit of £20,000.

A major trend in the evolution of the ISA has been towards greater flexibility. Money can now retain its tax free status if withdrawn but repaid into the account within the same tax year.

Rules have also been relaxed regarding which types of ISAs can be transferred into each other. Originally, cash ISAs could be transferred into stocks & shares ISAs but not vice versa. Now, the top stocks & shares ISAs can be transferred back into cash ISAs. This is a popular move as people approach retirement age and want to reduce their risk and get better access to their cash. 

This is a big question, and not one that Financial-Expert.co.uk can answer for you. 

A journalistic resource such as Financial-Expert.co.uk is clearly not in a position to provide you with financial advice which is tailored to your personal circumstances. 

Please read our disclaimer, and consider finding an independent financial adviser if you like the idea of someone else making the appropriate investment decisions for you.

If you’re interested in learning more about how to buy shares, and how to build an investment portfolio, we have plenty of helpful guides for beginners which can provide education on the basic principles applied by wise investors.