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10th
Feb 2020
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How much can I earn with a Stocks and Shares ISA?

How much can I earn with a Stocks and Shares ISA?

The ISA structure is a convenient and tax-free way for first-timers to get into the stock market. But how does an “investment ISA” pay you money – and how much of that money do you get to keep?

When you’re first looking at the returns on investment ISAs you’ll be bombarded with headline percentage rates for how much your money could be making.

But how do investment ISAs work – and how much of those profits can you keep?

  • How do Stocks and Shares ISAs earn money?
  • How much of my Stocks and Shares ISA earnings will be tax-free?
  • How much will a Stocks and Shares ISA pay out?

1 How do Stocks and Shares ISAs earn money?

You can earn money from investment ISAs as income, or capital growth. You’ll need to decide which is your priority.

Regular income could come in the form of interest or dividends, and can be used (for example) to supplement your pension.

Getting a bigger lump sum repaid at the end of your investment period could pay for a new car, or help you buy a holiday home or investment property.

  • Interest is paid by government and corporate bonds.
    • Government bonds (or “gilts”) usually pay out every six months.
    • Corporate bonds usually pay quarterly, but might pay out monthly, twice a year, or annually.
  • Dividends from shares: paid monthly, quarterly, half-yearly, annually, or “irregularly”.
  • Capital gains if the overall value of the investment you’ve made has increased by the time you decide to sell some or all of your investment ISAs.

THE IMPORTANT THING TO BEAR IN MIND…

Costs

While Cash ISAs are usually free, there are costs involved with Stocks and Shares ISAs:

  • Investing in a fund: an annual management charge.
  • Investing via an online “platform”: you usually pay an annual platform management fee of 0.3-0.55% of the value of your investment, plus a fee to your advisor or intermediary.
  • Investing via a “fund supermarket”: you’ll usually pay only one service charge.
  • Buying and selling shares yourself with a share-based Stocks and Shares ISA: dealing charges based on the number of your transactions.
  • Other fees: platforms might charge you if you want to switch between funds, or charge an “exit fee” or “transfer out” fee – but these are fairly rare now.

2 How much of my Stocks and Shares ISA earnings will be tax-free?

What’s really useful about an investment ISA is that it allows you to take the income tax-free.

  • The money you pay into an ISA has already had tax paid on it – there’s nothing to pay when you take it out.
  • Pensions, outside of ISAs, work the opposite way: you get tax relief / a tax advantage when you pay in, but the money you take out is taxed.

EVERYTHING you earn from an ISA is tax free. That includes:

  • All interest payments (from government and corporate bonds)
  • Rental income from property funds: are 100% tax free (if they’re held within ISAs)
  • Dividends from shares and pension funds within ISAs
  • Profits (capital gains) you make when you sell your investments

The only tax you have to pay on ISAs is Stamp Duty at 0.55 – on all share purchases valued at more than £1,000.

So if you use your entire £20,000 annual ISA allowance buying stocks and shares you’ll pay £95 in Stamp Duty.

Outside of ISAs, anything you earn above £12,500 (in 2019-20) is taxed.

There is an additional tax-free dividend allowance outside of ISAs of £2,000 for dividends paid on investments. But above that you’ll pay between 7.5% and 31% in tax. And you don’t want to be dreading an unexpectedly generous divided because it’s going to land you with a tax bill.

There’s also a separate tax allowance for capital gains outside of ISAs. You can make a profit of up to £12,000 (2019-20) on any assets such as stocks and shares, before you pay tax.

But you don’t want to lose track of investments which are steadily gaining in value which could benefit from the invisible tax cloaking of the ISA structure in future.

3 How well will my Stocks and Shares ISA perform?

Current interest rates are super-low (the Bank of England base rate is holding at 0.75% and doesn’t look like rising in the foreseeable future) (February 2020). So the interest you can earn if you just put your money in a Cash ISA is not going to build up in a profitable way.

Assuming a 2% interest rate (quite generous by today’s standards), £10,000 put away in a cash savings account today will compound to just £22,080 over the course of 40 years.

By contrast, investing that same £10,000 in the stock market at an annual return of, say, 5% will compound to a much more impressive £70,400 by 2060. Five times as much.

But… different types of ISA shareholdings offer different rates.

And you need to take off your investment management costs from that projected figure. Plus:

THE IMPORTANT THING TO BEAR IN MIND…

Risk

The share market goes up as well as down. (If it didn’t, everyone would invest all of their money in shares.)

You can see the fluctuations in share prices in the charts provided by independent fund research sites. So the “returns” on your investments are never guaranteed.

  • Which is why it’s wise to have a good spread of investments, and also some of your money left in cash.
  • You should also invest for at least five years, so you have a chance to ride out short-term fluctuations.

CHOOSE THE INVESTMENT ISA that might suit you best

Investment Fund Supermarket ISAs

Stocks & Shares ISA

from Fidelity

ISA Option
Allows ISA Transfers
Regular Savings
  • Protection Scheme: FSCS
  • Fund Choice: Choose from over 4,000 investment options, including one of the widest fund ranges in the UK, plus shares, investment trusts and exchange-traded funds. There’s also expert guidance to help with your investment decisions, which includes a selection of tools and insights from Fidelity’s experts. Capital at risk. Tax and ISA rules apply.
  • Invest From: £25 through regular savings or £1,000 lump sum

Why we like it: Fidelity has lots of investment options, plus an extensive range of guidance tools to help you decide what to invest in. Their award-winning ISA is easy to start and offers great value, their a typical service fee of just 0.35%. Other ongoing charges apply. On top of that, everything is backed by Fidelity’s 50 years of investment experience.

Important: The value of investments can go down as well as up so you may get back less than you invest. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Tax treatment depends on individual circumstances and all tax rules may change in the future.

Stocks & Shares ISA

from Hargreaves Lansdown

ISA Option
Allows ISA Transfers
Regular Savings
  • Protection Scheme: FSCS
  • Fund Choice: Choose from over 2,500 funds, shares, investment trusts and more to build your portfolio. UK and overseas shares. Corporate and government bonds. Exchange Traded Funds (ETFs). Ready-made portfolios to suit your goals and attitude to risk from £1,000. Expert research to help make your decisions. Investment trusts and much more. Capital at risk.Tax & ISA rules apply
  • Invest From: £25 pm or from £100 lump sum

Why we like it: Choose your own funds or alternatively a ready made portfolio. Market-beating savings and discounts of up to 5.5%. No charge to buy and sell funds. Low, tiered annual charges for holding funds, with a maximum of just 0.45% per annum. Free fund updates and analysis from experienced research team. Invest with a financially secure, FTSE 100 company.

Important: The value of your investments can rise as well as fall. You may get back less than you invested. If you’re unsure, we recommend you ask for independent advice.

Model Portfolio ISA

from Interactive Investor

ISA Option
Allows ISA Transfers
Regular Savings
  • Protection Scheme: FSCS
  • Fund Choice: Need help choosing the right investments? ii's experts have carefully selected investments to point you in the right direction.
  • Invest From: £25 a month or any lump sum

Why we like it: Designed to make it easier for investors, these four portfolios offer either growth or income options, with a choice of actively managed investments or low-cost tracker funds including an ethical growth portfolio. Low cost fees and trading.

Important: The value of your investments can rise as well as fall. You may get back less than you invested. If you’re unsure, we recommend you ask for independent advice.

Important Risk Information:

The value of investments can go down in value as well as up, so you could get back less than you invest. It is therefore important that you understand the risks and commitments. This website aims to provide information to help you make your own informed decisions. It does not provide personal advice based on your circumstances. If you are unsure of how suitable an investment is for you, please seek personal advice.

High Income ISAs

High income ISA ideas:

ISAs Products

Cash ISAs

Fixed Rate & Instant Access ISAs:

Cash ISAs: 

Stocks & Shares ISAs

Types of Stocks and Shares ISA include: 

Stocks and Shares ISAs

Latest News

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15th March 2021

You've decided to invest your savings into a Stocks and Shares ISA. You'll be using your tax-free ISA allowance for this year before the deadline, while also investing your money for your future. But what do you need to consider before opening an account? We've put together a list of our top five considerations for you to think about before you click "apply". 

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