Stocks and shares ISAs: an alternative to cash ISAs?
With news that the Chancellor of the Exchequer, Rachel Reeves, may reduce the cash ISA allowance at some point, many savers are asking how else they can save their money in a tax-efficient way.
Rachel Reeves was expected to announce a reduction in how much someone can pay into cash ISAs each year. Those plans are now on hold after backlash from banks, building societies and consumer campaigners.
The overall ISA limit remains £20,000 each tax year and you can still pay this entire allowance into cash ISAs. This may be reduced in the future but we don't expect it to change anytime soon.
However, the Chancellor's reasoning may have made you question if investing your long-term savings, such as into a stocks and shares ISA, for the potential to get better returns could be right for you.
She’s been quoted saying:
“It's really important that we support people to save, to achieve their aspirations. I'm not going to reduce the £20,000 ISA limit but I do want people to get better returns on their savings, whether that's in a pension or in their day-to-day savings.”
This may not be the right choice for everyone. If you're expecting to need the money in your savings within the next five years, for example, you might choose to save rather than invest due to investment risk.
So, is it time to open a stocks and shares ISA for your long-term savings? Before you decide, let’s explore what cash ISAs are and what might lead someone to open a stocks and shares ISA either instead or as well.
What are cash ISAs?
Cash ISAs are a type of savings account that earn interest on your money and aren’t invested.
Your money grows by the interest rate you get on your cash ISA but it's worth being aware that there is a risk inflation might be higher than the interest rate you're getting. In this situation, your money may be able to buy less when you withdraw it than it can now, even if it has gained interest.
As with all ISAs (including stocks and shares ISAs), no matter how much money you make, you won’t pay any Income Tax or Capital Gains Tax on the money you take out. That’s what makes ISAs different to other types of saving accounts.
But it’s worth noting that not everyone needs to pay tax on their savings anyway, so this advantage isn't relevant to everyone.
Do I need to pay tax on my savings?
If your money is in a non-tax-exempt account and you pay basic rate tax (you earn between £12,571 and £50,270), you can make up to £1,000 a year in interest or investment returns on those savings before you need to pay any tax on it. If you’re a higher rate taxpayer (you earn between £50,271 and £125,140), you can make up to £500 a year in non-tax-exempt savings before being taxed on it.
This is known as your personal savings allowance. If you make less than this from saving and/or investing, you won't pay Capital Gains Tax or Income Tax on this money, even if it's not in an ISA.
Should I move my money into a stocks and shares ISA?
It depends on what your savings goals are.
You might decide you’d like to move money into a stocks and shares ISA, or open one alongside your cash ISA, for example:
- if you’d like to split your savings so you have short-term savings in a cash ISA and longer-term savings in stocks and shares
- if you’d like to start investing your money to give it greater potential to grow*
*Investment growth isn’t guaranteed
Pros and cons of stocks and shares ISAs
When you pay into a stocks and share ISA, your money is invested. It’s pooled with other investors’ money and used to buy different types of investment, which could be assets like property and shares in companies, for example.
The value of your account changes as the value of those investments goes up and down.
This gives your money better potential to grow than it has in a cash ISA where it’ll grow with interest rates. But with stocks and shares, the value will go both up and down over time. So, there is a risk that you could get back less than you pay in, if you withdraw your money at a time when the value is low.
| Pros | Cons |
|---|---|
| Greater potential to grow than options that rely on interest rates | Recommended for longer-term investing (five years or more) |
| Annual allowance limit likely to remain £20,000 (this is currently the same as the cash ISA limit) | Risk that you could lose money, if you withdraw at a time when the value has gone down (this is more likely to be the case if you're investing short term) |
Find out how cash and stocks and shares compare in our article: Is it better to save or invest your money?
Next steps
Whatever you decide to do, it’s important to weigh up your options first and decide what’s right for you.
With OneFamily’s Stocks and Shares ISA you can start investing from as little as £25 a month by Direct Debit.
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