5 incorrect Stocks and Shares ISA myths, busted

ISAs, standing for “individual savings accounts”, have become a common feature of the modern financial landscape since their inception in April 1999.

These tax-efficient savings and investment wrappers have become extraordinarily popular, reducing Income Tax and Capital Gains Tax (CGT) bills for millions of savers. In fact, official government figures from 2021 show that there were 13 million adult ISAs in 2019 to 2020.

Unfortunately, alongside the great benefits they’ve offered investors in their 23 years of existence, there are now many myths and misconceptions with ISAs.

In particular, the Stocks and Shares ISA has been a victim of such misinformation, leading most savers to favour Cash ISAs and forgo the tax-efficient benefits these investment accounts can offer.

So, here are five incorrect Stocks and Shares ISA myths, busted.

1. You can only pay into one type of ISA each year

Each tax year, you can save up to the ISA allowance into your accounts, which stands at £20,000 in the 2022/23 tax year.

With many different ISAs out there, some would-be investors become concerned that by investing through a Stocks and Shares ISA, they’ll be unable to make the most of another available account.

In fact, this isn’t correct at all. The ISA allowance counts across all different kinds of ISAs, allowing you to spread your £20,000 across your accounts as you see fit.

For example, you could save £10,000 in a Cash ISA and then invest a further £10,000 through a Stocks and Shares ISA, all in the same tax year.

The only rule to note here is that you can only contribute to one of each type of ISA – that is, you couldn’t open and invest in two Stocks and Shares ISAs in a single tax year, unless you transferred the entire value of your ISA from one to another and only paid into your new account.

But you’re more than free to use your allowance across the spectrum of ISAs, from Cash ISAs to Lifetime ISAs and Innovative Finance ISAs.

2. You have to invest your money straightaway

You might think that opening and contributing to a Stocks and Shares ISA means you’ll instantly have to make investment decisions.

In truth, you’re actually able to hold your money in cash within the ISA wrapper until you’re ready to invest.

It can even be sensible to maximise your ISA allowance in a tax year, even if you don’t intend to invest instantly.

For example, if you contributed £20,000 to your ISA before the end of the tax year and held it in cash, you’d then be able to contribute another £20,000 when the allowance resets in April.

That means you’d be able to actually invest up to £40,000 in a single tax year, even if you had been holding your money as cash.

If you don’t use your allowance, you’ll lose it. So, it can make sense to do this in order to make the most of the tax efficiency on offer.

Either way, there’s no obligation to instantly invest; you can simply hold your money as cash and wait until you’re ready to do so.

3. Your money is trapped in the account

One fear many investors have is that their money will be trapped in their ISA. Once again, this is not accurate.

Your money is absolutely not trapped in your ISA at all. In fact, with most Stocks and Shares ISAs, you’re free to withdraw at any time. This may take a few days for some providers to process, but there are no rules preventing you from doing so.

Of course, you will have to liquidate your investments and withdraw them as cash unless you arrange what’s known as an “in specie” transfer and move them into a General Investment Account (GIA) as investments.

You will also lose the portion of your ISA allowance if you contribute to your ISA and then withdraw the same amount in the same tax year, unless your ISA is “flexible”.

Even so, your money is by no means trapped, and you’re free to withdraw it whenever you like.

It’s worth noting that, if you’re investing in equities, you should have a minimum time frame of five years for holding your investments. So, while you can access your fund, it can be sensible to only invest money you don’t need to hand.

4. You don’t pay tax on investments anyway

This myth likely stems from the fact that there’s an annual exempt amount for CGT. In 2022/23, every individual can generate up to £12,300 in capital gains before they’ll owe CGT.

However, any gains that exceed this amount may be taxable. CGT rates in the current tax year are:

10% (18% on property that isn’t your main residence) for basic-rate taxpayers
20% (28% on property that isn’t your main residence) for higher- and additional-rate taxpayers.
So, for investments held in a GIA, CGT could eat into your gains when you come to liquidate your investments if they’ve risen in value.

Similarly, you may owe further tax if investments in your account receive dividends. There is a Dividend Allowance before any tax is due on your dividends, standing at £2,000 in 2022/23. But any dividends generated above this amount may incur a tax charge, with rates as detailed below:

75% for basic-rate taxpayers
75% for higher-rate taxpayers
39.35% for additional-rate taxpayers.
Again, these amounts could reduce how much you receive from your investments.

Meanwhile, returns in a Stocks and Shares ISA are entirely free from CGT and Tax on dividends, potentially saving you a CGT bill of up to 20% on stocks, shares, and other non-property investments, and up to 39.35% on dividends.

5. It’s always better to invest in your pension than through an ISA

Your pension is certainly a very useful, tax-efficient way to save for your future. Your money will be free from Income Tax and CGT, and you’ll also receive Income Tax relief on personal contributions up to 100% of your earnings in the tax year, as long as they are also within the Annual Allowance.

In the 2022/23 tax year, the Annual Allowance sits at £40,000 and includes both personal and employer contributions.

However, if you have reached this limit, you won’t receive any more tax relief on your contributions. So, it can make sense to use your ISA allowance in conjunction with your pension savings to make the most of all available tax allowances.

Additionally, money you contribute to your pension will be locked away until you turn age 55, rising to 57 in 2028. So, if you’re likely to need the funds before then, an ISA could be preferable.

As discussed above, you can access your ISA holdings at any time. That means, by using your ISA instead, you can invest your money while still being able to access it if you need to.

Work with us

If you’d like to find out how we use Stocks and Shares ISAs to help you achieve your retirement goals, please get in touch with us at Britannic Place.

Email info@britannicplace.co.uk or call 01905 419890 to speak to an experienced adviser.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.