ISAs explained?

Hi all, I’m fairly new to this game and when I started putting more than pocket change into FT I invested in an ISA account.

I’ve now got a growing portfolio and I wanted to learn more about how this works.

I understand that there’s a limit of Ā£20,000 per ISA per year.

So, here’s a couple of questions:

  • If I put say, Ā£3,000 into my ISA, and that magically grew into Ā£28,000 in investments, does that mean I am not able to sell more than Ā£20,000 worth of my holdings in one go? Would I have to sell Ā£20k’s worth, then withdraw that from my ISA before selling more holdings?
  • If I can sell more than Ā£20,000 worth of holdings in one go, does that just mean I pay tax on anything over that limit?
  • If I then withdraw my funds from my ISA to my standard bank account, will I then need to pay income tax etc on it? If so, how does that work, and what is the point in the ISA if you’re having to pay tax on it eventually anyway?

Thanks for entertaining the questions of a new investor.

2 Likes

Quite simply, no. ISAs are a tax wrapper. You have a maximum allowance of Ā£20k, but everything within that wrapper is protected from tax. You’re not limited beyond putting in that money. In other words, you can withdraw as much as you want and profit as much as you want. If, in theory, you made Ā£100,000 by investing that Ā£20,000 it’s all yours. No tax, no withdrawal limit and no needing to limit when you sell off your holdings.

Naturally, the yearly limit counts. Anything outside of an ISA - in a general investment account for example - isn’t protected and is subject to capital gains tax. You of course can’t move shares from a GIA to your ISA. Everything you purchase in your S&S ISA and within your limit is tax-free and protected, though.

Naturally, you should always seek out the services of a tax professional if you’re in any doubt. I’m just a moron on the internet and nothing I tell you is legitimate tax advice.

1 Like

The £20k per tax year ISA limit is your subscription limit. e.g. this is the limit you can put into all your combined ISAs within a tax year. It doesnt matter what happens with the money inside the ISA once its in.

Keep in mind the £20k limit applies as one limit across all ISA products. So if you add £5k to a IFISA you only have £15k left that you can put into other ISAs like a S&S ISA.

You may have to sell in lumps (Freetrade has a maximum value per trade) but you can make as many as you like. Once its in the ISA its in the ISA.

No. ISAs are a wrapper protecting anything inside it including gains from tax.

2 Likes

You already paid tax on the way in.

Thanks everyone for your answers, this all seems far better news than I expected.

So just to check I’ve got this right, this is now my understanding.

I can deposit a maximum of Ā£20k into my ISA (or across all my ISAs if I have more than one, which I don’t), per year. This is referring to transferring funds from my regular bank account, into my Freetrade S&S ISA.

That money is then invested into stocks, and lets say theoretically it turns a Ā£100,000 profit and I sell all those stocks, my ISA will now have Ā£120,000 in it. Now, as I haven’t deposited any more money, (that’s just money that has increased through investments), even though the contents of my ISA has increased by Ā£120,000 in one year, that’s fine and I’m not paying tax on any of it.

Then, I want to actually spend that money, so I withdraw that Ā£120,000 (presuming I didn’t want to recycle it back into stocks), and transfer it to my highstreet bank current account and start spending it.

That Ā£120,000 remains completely tax free and I won’t lose any of that when it comes to sending off my tax report in January (I’m a freelancer so submit my sole trader taxes in Jan).

Have I really got that right? If so that’s far better than I expected it to be!

2 Likes

Yes. The only thing to clarify is you can only deposit into one of each type of ISA in a single tax year. So if you decide to put, say, Ā£12k into your Freetrade ISA, you cannot deposit into another S&S ISA in that year, and you can’t deposit more than Ā£8k into a cash ISA.

2 Likes

Yeah, you’ve got it right.

You’ve not asked but just a point on ISAs themselves. There are a few type you can only contribute to one of each type per tax year, unless you transfer the entire ISA. The Ā£20k deposit allowance (or subscription) is shared among them all.

There are 4 types

  • cash ISAs.
  • stocks and shares ISAs.
  • innovative finance ISAs.
  • Lifetime ISAs.

So for example, if you have your Freetrade S&S ISA and deposit Ā£10k and then want to open a S&S ISA with Hargreaves Lansdown, you coud open the account but you cant deposit any money into it since you’ve already deposited money into an existing S&S ISA in the same tax year. You would have to transfer the ISA from Freetrade to HL, which you are allowed to do.

But you could open a Cash ISA or any of the other types, and you’d have Ā£10k left of your allowance to deposit money into those accounts.

On one more note. Some ISAs are ā€˜flexible’ and some are not. If you take money out the Freetrade S&S ISA you don’t regain your allowance.

If you put £10k in in one tax year, and within the same tax year take out £10k, you still only have £10k of your allowance left, not £20k.

4 Likes

A quick question

In my GIA (Invest acc) i have made some gain in last 4 year of my Freetrade journey.

Im planing to cash about 40-50% for down payment for a property. Tax free allowance on capital gain is £12,300 of this year, my planed sale n withdrawal will exceed this limit.

i do have another share and ISA account which i know is free from capital gain, but i have taken massive loss this year in my ISA account from sales. Can i show losses from ISA account to of set my Invest gains.

I believe ISA losses cant be used to offset investment gain; but i thought its worth the ask from our community. Someone that may have been in a similar situation.

Thanking in advance for reading and your kind opinions.

1 Like

No you can’t do that.

You can withdraw the CGT amount today and then the same in the new tax year to effectively double the amount.

3 Likes

Hi. Sorry to butt in here.
Does anyone know what the consequences are if you pay into 2 separate stock isa in the same year ?
But don’t breach the Ā£20k limit.
I’ve even phone HMRC today and they can’t tell me.
They told me to inform the isa provider.
They came back and said we can’t give tax advice. Contact a financial advisor :see_no_evil:

There is no consequence. You can have as many S&S ISA’s as you like as long as you don’t go over the Ā£20k limit in a year.

You can only invest £20k with 1 Isa provider per year tho.
I’m still at a loss if you break the rules.

I did it once and they wrote to me telling me off. It was something like £15 many moons ago. I believe they threatened to tax the interest is earned tax free.

2 Likes

But you can’t open or fund more than 1 of a kind in the same tax year.
Not sure why you’re pushing incorrect information here?!

You can put money into one of each kind of ISA each tax year.

1 Like

On a more broad note… I’ve always wondered what is the point in ISAs from a societal and policy perspective?

Why do they exist? Which government created them and what problem were they trying to solve at the time?

Nothing against ISAs I’ve just never understood them on that level.

Yes @SebReitz thats what i was trying to explain but should have articled it better. The link is helpful.

2 Likes

Don’t forget that Freetrade has a decent set of articles in the Learn Hub about stocks and shares ISAs. Recommend this as a first port of call for people who are interested the topic of the post.

2 Likes

Chris Palmer (YouTuber) recently made a video on ā€˜best’ stocks and shares ISA which included Freetrade. Personally I would have placed Freetrade much higher than he thought but it may offer some helpful info for some.

Have never heard of Invest Engine. Curious about that.

Doesn’t quite give the full picture without mentioning Interactive Brokers or Trading 212 (although in fairness the latter still has a waiting list).

Invest Engine looks like a good proposition for ETF investors. Much like Vanguard but with more choice

1 Like