An individual savings account (ISA) is a tax-efficient way to save or invest money in the UK. The money you put into an ISA is not subject to income tax or capital gains tax, and you can withdraw the money at any time without paying any taxes.
However, it’s important to note that you will only be exempt from paying taxes on your ISA if you sell your shares within the ISA wrapper. If you sell your shares outside the ISA wrapper, you will be liable for capital gains tax on any profits you make.
So, if you’re considering selling your shares in an ISA, it’s essential to consider whether or not you’ll be liable for any taxes.
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When are you liable to pay taxes?
If you sell your shares outside of the ISA wrapper
If you sell your shares outside the ISA wrapper, you will be liable for capital gains tax on any profits you make.
If you withdraw money from your ISA
Withdrawing money from your ISA will not trigger a tax liability, but it will reduce the amount of money that can grow tax-free within the account.
If you hold shares in a company that pays dividends
Dividends are taxable, but the first £5,000 of dividends received each year are tax-free.
How to invest in an ISA
Choose the right ISA
There are four types of ISAs: cash ISAs, stocks and shares ISAs, innovative finance ISAs and lifetime ISAs. Traders can choose one or more of these ISAs, but they can only invest up to the annual limit in any given tax year.
The annual limit is £20,000.
Open an ISA account
Once you’ve decided which type of ISA you want to invest in, you’ll need to open an ISA account with a provider, usually a bank, building society or investment platform.
When you open an account, you’ll need to decide how much money you want to invest and how often you want to make contributions. You can make lump sum investments or set up a regular investment plan.
Start investing
Once you’ve opened your account, you can start investing. The process will vary depending on the type of ISA you’re investing in
For example, if you’re investing in a cash ISA, you’ll need to transfer money into your account from your bank account. If you want to invest in a stocks and shares ISA, you’ll need to choose the investments you want to buy and instruct your provider to buy them for you.
What are the risks of investing in ISAs?
You could lose money
All investments carry some risk, and ISAs are no different. The value of your investments can fluctuate, and you could get back less than you invested.
Your investment may not keep pace with inflation
If the inflation rate is higher than the interest rate on your cash ISA, the actual value of your money will decrease over time.
You may need to pay taxes on your withdrawals
Withdrawals from cash ISAs are tax-free, but withdrawals from stocks and shares ISAs may be subject to capital gains tax.
You may struggle to access your money
Some ISAs have restrictions on when you can withdraw your money. For example, lifetime ISAs have a withdrawal charge if you take money out before age 60.
How to minimise the risks of investing in ISAs
Diversify your investments
Don’t put all your eggs in one basket. Investing in a mix of different types of ISAs can spread the risk and protect yourself if one type of ISA performs poorly.
Review your investments regularly
Your circumstances and goals may change over time, so you must review your investments regularly to ensure they’re still right for you.
Use your ISA allowance wisely
Think carefully about how much you want to invest in each type of ISA. You may want to use some of your allowances to offset potential losses on other investments.
Consider using an investment platform
Investment platforms offer a wide range of investment options, which can be an excellent way to diversify your ISA portfolio.
Take professional advice
If you’re unsure where to start, consider taking professional financial advice. A qualified adviser can help you choose the right ISAs for your circumstances and goals.
Click here to open an ISA account with Saxo Markets, an FCA-regulated broker.
