What is a stocks and shares Isa – and why do millionaires love them?

There is no better tool in an investor’s belt than a stocks and shares Isa.

A tax-efficient and flexible way to gain access to the stock market, the product has steadily increased in popularity since it was launched in 1999.

Nearly 4m investment Isas were paid into last year, up from 3.5m the year before and 3m a decade ago, with more than £34bn invested in them through the 2021-22 tax year, according to HMRC data.

Whatever your investment experience or wealth — there are more than 4,000 “Isa millionaires” — an Isa can be the ideal place to grow your savings. Here’s what you need to know.

How does a stocks and shares Isa work?

An Isa is what is known as a “tax wrapper”, a fancy way of saying that the money you keep inside it is somewhat protected from tax.

There are different types, but a stocks and shares Isa is for money that you want to invest. It is called “tax-efficient” because you do not pay capital gains tax when your investment grows, or dividend tax on any income you earn from shareholder payouts.

What you do with the money held in your Isa is up to you – it is just a “wrapper”, rather than a specific investment choice.

You can open one on any investment platform – such as Hargreaves Lansdown, interactive investor or AJ Bell – and then decide where to invest your money. 

Most platforms offer a range of funds, investment trusts or individual shares, as well as ready-made portfolios that do the heavy lifting for you.

Am I eligible for one?

You can open a stocks and shares Isa if you are over the age of 18 and a resident in the UK.

If you are under the age of 18 and over the age of 16, you can open a cash Isa. Stocks and shares junior Isas are also available for those under the age of 18.

If you plan to use the money for a house deposit or to fund your retirement, consider a Lifetime Isa instead, which offers a tax-free bonus for savers.

When should I invest in a stocks and shares Isa?

A stocks and shares Isa is likely a good first port of call when you start investing – or at any point when you have spare money to put into the stock market – because it is tax-free.

As a general rule of thumb, experts suggest you have three to six months’ worth of outgoings in “rainy day” savings. After that, you can begin to invest in the stock market through an Isa.

A pension is also tax-free and is a good place for any long-term savings, typically to fund your retirement.

There are also tax-efficient investment vehicles like venture capital trusts (VCT) or enterprise investment schemes (EIS), but these are typically higher risk and only suitable for experienced investors.

How much can I pay into a stocks and shares Isa?

Your overall Isa allowance is £20,000 per tax year, split across all Isa products. Most of the time, you will be stopped by your provider if you try to pay in too much. If you do pay in more than £20,000, contact HMRC.

You can also only pay into one of each type of Isa each year. For example, you could pay £10,000 into a cash Isa and £10,000 into a stocks and shares Isa, but you couldn’t pay £10,000 into two different stocks and shares Isas.

Are they a safe investment?

All investing comes with an element of risk and there is no guarantee that you will make money in the stock market – in fact, you could lose money.

It’s usually a good idea to keep any funds you may need in the next three to five years in cash savings instead, so you are not forced to sell up if your investments have fallen in value.

As a product, an Isa is squeaky clean. It is a government-run scheme and, provided you choose an accredited and trusted provider (check the Financial Conduct Authority register), you should be safe from scammers.

Can I easily access the money in a stocks and shares Isa?

Yes. You can withdraw money from your stocks and shares Isa whenever you please, and as many times as you wish.

There are a few things to remember, however. The withdrawal must come from cash, so if you want to withdraw funds but do not have a cash buffer in your account, you will need to sell some of your investments (at the current market price) to get the money.

Also, any withdrawal does not necessarily count against your yearly allowance. This depends whether your Isa is “flexible”, which your provider should be able to tell you.

If your Isa is flexible, you can take out cash and put it back in without reducing your yearly allowance.

For example, say you put £10,000 into an Isa then took out £3,000. If your Isa is flexible, then your remaining allowance would be £13,000 — the £10,000 you had left of your £20,000 allowance, plus the £3,000 you took out. 

If your Isa is not flexible, then your allowance would be £10,000 (simply the allowance you had left).