Five reasons to invest in an ISA this tax year
We look at five reasons to consider investing in a Stocks and Shares ISA.
Last Updated: 6 April 2024
We believe a Stocks and Shares ISA should be the foundation of an investment portfolio. Here are 5 reasons why.
This isn't personal advice – if you're not sure if an ISA is right for you, you should ask for financial advice.
1. Investing can beat cash over the long term
There’s never a bad time to consider investing when you’re focussing on the long term – five years or longer.
No one knows whether the stock market will be higher or lower tomorrow. There’s never really a picture-perfect moment to invest or to sell. And buying in at the market low point and selling at the top is almost impossible to get right.
Generally, investing in the stock market has yielded better returns than cash over the long term.
Taking a long-term approach with your investments helps cut out the short-term noise and with it, the worries about finding the right time to invest.
If you think you’ll need the money in the next five years, it’s sensible to hold cash.
So if you’re putting away money for the long term, and are happy with the extra risks involved, investing in a Stocks and Shares ISA could give you a better chance of growing your money.
But remember unlike the security offered by cash, investments and any income they produce can fall as well as rise, so you could get back less than you put in. Inflation can reduce the future spending power of money.
2. Tax savings
It would be difficult to discuss ISAs without mentioning their excellent tax benefits. It’s what they’re best known for.
ISAs offer the opportunity to grow your money free from UK income and capital gains tax. So if your investments go up in value, you won’t have to pay capital gains tax. And if your investments make income, you won’t pay UK income tax either.
This makes using your ISA allowance something of a ‘no-brainer’ for many. The investments themselves are the same whether they’re held in an ISA or not. But if you invest in an ISA you could save tax, which means you might get higher returns although of course there are no guarantees.
It’s worth remembering tax rules can change, and the benefits highlighted will depend on individual circumstances.
3. Your tax status can change
Putting money in an ISA isn’t just about saving tax today, it’s about sheltering your money from tax in the future too.
The higher-rate income tax threshold and the personal allowance are set to be frozen until 2028. So, more people may find themselves in a higher tax bracket, e.g. if their wages increase. And potentially pay more tax on savings and investments held outside of an ISA if their allowances don’t cover their income or gains.
If your investments grow or generate more income, you could face tax on your savings far sooner.
And taxes could always rise even if your income doesn’t.
But, if you want to move your money into an ISA later, the allowance in that tax year might not be enough. Or you might have to realise gains by selling investments that could be taxed.
So it could be worth doing when you start investing rather than as an afterthought.
4. Taxes can be taxing
If events over the past few years have taught us anything, it’s that the value of investments can change quickly. And while you don’t want to make rash decisions, you also don’t want tax rules to impact your decision making.
Sometimes investors won’t sell an investment when they perhaps should because they might pay capital gains tax on their profits. This can lead to poor and often costly financial decisions.
An ISA lets you make changes to your holdings without needing to think about the UK income and capital gains tax implications. That means you can focus more on growing your investments over the long term, rather than worrying about any tax bills that could come your way. Tax rules can change and benefits will depend on personal circumstances.
You also don’t need to include income, gains or losses from investments in your ISA on your tax return. This saves you time, hassle and potentially difficult calculations getting it right.
And if you’re employed and taxed on a PAYE basis, an ISA could save you from needing to complete a tax return altogether.
See how much your ISA could be worth
5. It’s a small price to pay
The benefits of an ISA don’t need to cost a lot. Although you are limited by how much you can put in ISAs by the ISA allowance (£20,000 this tax year 2024/2025). This is the total amount you can put into all types of ISA (there is a limit of £4,000 for Lifetime ISAs) in this tax year.
With HL, it doesn’t cost you anymore to hold funds in a Stocks and Shares ISA. So you’re not paying any extra for the tax benefits compared to a Fund and Share Account.
For holding shares, ETFs, bonds and investment trusts in our ISAs we charge 0.45% p a, capped at £45 a year. For a Fund and Share Account we don’t charge. View our charges.
