An important part of what a Stocks ISA or a Stocks and Shares ISA is that it’s a government backed account. ISA stands for Individual Savings Account, it’s not the same as a normal savings or investment account.

What is the difference between a regular savings or investment account and an ISA?

The difference is that interest is tax free, investment gains are tax free and dividends are tax free. With a Stocks ISA, any gains you make from this account is tax free. It’s a very powerful tool that will make you, essentialls free money. Not many countries have this opportunity.

If you open a regular account and invest in stocks and shares, technically your profits and dividends are taxable.

Do I have to pay tax on regular stocks and shares that I buy?

The short answer is yes, if you buy a stock or share in a company and you make a profit you will have to pay capital gains tax. Below are come clear cut rules:

• You only pay tax on gains that are over £3000 annually.

• If your gains exceed £3000, basic rate taxpayers pay 18% on shares, while higher/additional rate taxpayers pay 24%.

Meaning if you earn £50,270+ from your job (self employed or employed) you’ll be on the higher tax bracket of 24% on your gains. Between £12,571 and £50,270 you pay 18% on gains.

If you are on the lower rate and earn £10k profits in stocks and shares you’ll have to pay £1,260 tax. Because £10,000 – £3000 tax free allowance, you are taxed at 18% on the remaining £7000.

• Tax is only paid on the profit (selling price minus purchase price).

You don’t pay tax on profits when you use a Stocks and Shares ISA which is why it’s worth getting one.

Should I get a Stocks and Shares ISA?

It’s completely up to you if you want one but I highly recommend it. You can invest up to £20,000 a year, and any profits you make from that £20,000 is compeletly tax free.

In theory, if your investment goes to £40,000, you get £20,000 completely tax free. That’s basically free money! You don’t even need to declare you’ve made that money, it’s almost the only way you can earn money without getting tax on it in the UK.

You can choose what you invest in, and many apps like Trading 212 make it very easy and clear on how to do it.

The screenshot below shows the fund that I invested in called “BlackRock Core”. It’s a collection of ETFs in various different places. I chose this one based on its past performance and diversity of shares.

As you can see, in the past year it got a return of 13.03%, in the past 3 years it’s gone up by 10.73%.

There are various “pies” that you can invest in, from one called “Almost Daily Dividends” to AI Stocks to “The Compounding Investor Pie”. I highly recommend you have a look through these and make your own choices, make sure you look at how many people are copying, as well as there returns. Remember just because lots of people are copying, doesnt mean it’s a good investment.