Stocks and shares ISAs

An ISA (Individual Savings Account) is a tax-efficient wrapper that can be applied to savings and investments. This means that any income or dividends that you receive from investments or savings along with any capital gains is tax-free. Anyone aged 18 or over can invest in a stocks and shares ISA, however you only need to be 16 to invest in a cash ISA.

Equity is another word for share. The capital of a company is divided into shares. Each share forms a unit of ownership of a company and is offered for sale so as to raise capital for the company.

Shares can be broadly divided into two categories - ordinary shares and preference shares.

Ordinary shares give their holders the right to share the earnings/profits in the company as well as a vote in the AGMs of the company. Such a shareholder has a share of the profits but also must bear the losses incurred by the company.

Preference shares, however, earn their holders dividends only. These dividends must be paid out before any dividends are paid to ordinary shareholders. Preference shares are fixed, offering no voting rights.

Ordinary shareholders are regarded as the real owners of the company. When the shares are offered for sale directly by the company for the first time, they are offered in the primary market, whereas the trading of shares takes place in the secondary market.

When we talk about equities, we are generally talking about ordinary shares.

The current ISA allowance (which has been in effect since 6 April 2017) is £20,000 and will be applicable until the end of each tax year (5 April). If you do not invest your full allowance during the tax year, you cannot carry over any remaining amounts into the next tax year.

The current ISA offers flexibility that has not previously been available to investors. You can now choose to split your allowance between cash and stocks & shares as you wish. For instance, you could invest the full £20,000 allowance into a cash OR a stocks & shares ISA. Alternatively, you could invest your allowance in any combination of amounts between a cash and stocks & shares ISA up to the £20,000 allowance.

ISA rules state that you can only subscribe to one ISA provider in any one tax year. However, if you choose to invest with a platform (also known as a 'fund supermarket') such as Aegon or Fidelity FundsNetwork, you have the opportunity to invest in a wide range of funds from various fund providers in the same tax year.

The current ISA allows for investors to transfer from a cash ISA to a stocks & shares ISA and vice versa. When it comes to transferring a previous year's ISA, you can transfer from one provider to another whilst retaining the ISA wrapper. This will not affect your allowance for the current tax year. Please note that if you wish to transfer an ISA, you should not encash the investment yourself as any investment you make into an ISA after withdrawing funds will count towards your £20,000 allowance.

Investors can now pass on their Individual Savings Accounts (ISAs) to their spouse when they die and keep their tax free status.

Previous rules had removed the tax-exempt status of ISAs on the saver's death, meaning their widow would have to start paying tax on the total amount held within the ISA wrapper. We believe this is a welcome and long overdue change which has previously been the cause of much frustration at what would be a difficult time.

From April 2016 the dividend tax credit was replaced by a new tax-free dividend allowance. The dividend allowance means that you won't have to pay tax on the first £2,000 of your dividend income, no matter what non-dividend income you have. The allowance is available to anyone who has dividend income. Headline rates of dividend tax are also changing.

You'll pay tax on any dividends you receive over £2,000 at the following rates:

• 8.5% on dividend income within the basic rate band.
• 33.75% on dividend income within the higher rate band.
• 39.35% on dividend income within the additional rate band.

The dividend allowance will not reduce your total income for tax purposes. However, it will mean that you don't have any tax to pay on the first £2,000 of dividend income you receive. Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £2,000 allowance.

Where appropriate to the calculations, the examples use the limits that will apply from April 2022:

• Personal allowance: £12,570.
• Basic rate limit: £50,270.
• Higher rate: £150,000.
• Aditional rate: over £150,000.

To calculate your tax band, you will need to add your total dividend income to your other income. You may pay tax at more than one rate.

Example

You get £3,000 in dividends and earn £29,570 in wages in the 2022/23 tax year. This gives you a total income of £32,570. You have a personal allowance of £12,570 which you can take off your total income leaving a taxable income of £20,000.

Therefore the tax you would pay is:

• 20% tax on £17,000 of wages.
• No tax on £2,000 of dividends due to the dividend allowance.
• 8.75% tax on the remaining £1,000 of dividends.