Finding investments for my investment ISA

Building up your own investment portfolio in a stocks and shares Individual Savings Account (ISA) can be an exciting prospect. This essential guide will get you started.

The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

What you’ll learn:

  • How to set investment goals
  • Which investments pay you an income
  • Why you might decide to invest in riskier assets like shares.

In the current 2022-23 tax year, you can put up to £20,000 into tax-efficient ISAs. You can split your allowance between a cash, investment, innovative finance and a lifetime ISA1 if you want to and all gains will be free from income tax, tax on dividends and capital gains tax. However, with a lifetime ISA, you can only pay in up to £4,000.

Here, we look at how to choose investments for your investment ISA if you’ve decided that an investment ISA is suitable for you. You should bear in mind that investments can fall in value as well as rise. You may get back less than you put in.

Remember that if you invest outside an ISA, you won’t pay tax on profits made unless they are above the annual CGT allowance, which is £12,300 in the 2022-23 tax year. Profits that exceed this are subject to tax at 10% or 20% depending on your tax band. When you invest in an ISA, even if the profit you make is above this £12,300 threshold, you won’t have to pay CGT.

Similarly, the first £2,000 of dividends earned from investments held outside an investment ISA, are tax-free. This is known as the dividend allowance. If you exceed this threshold, you will be taxed at a rate of 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. All dividends received on shares held in an ISA are tax-free.

There’s also no tax to pay on any interest you earn from cash, funds, gilts or bonds within an ISA. Outside an ISA, the personal savings allowance (PSA), enables basic-rate taxpayers to earn up to £1,000 interest in savings income a year tax-free, or £500 for higher-rate taxpayers. Additional rate taxpayers aren’t entitled to this allowance.

Bear in mind that tax rules can and do alter over time, and the value of any favourable tax treatment to you will depend on your individual circumstances, which can also change.

Match your spending goals to your investments

When approaching your investments, and anticipating returns, you'll stand a better chance of success if you know at the outset what your goals are.

Think carefully about why you are investing. Are you putting money aside to cover future holidays, university costs for your children or are you hoping your investments will help you pay for a house extension? Your own reasons for investing will determine your investment time-frame.

The type of investments you choose will depend not only on how long you have before you will need your money but also the level of risk you are prepared to accept. If, for example, you are saving up for school fees which you will need in the next few years, you'll probably be looking for less risky investments such as bond funds.

Find out more about our Investment (Stocks and Shares) ISA

What are bonds?

Bonds are essentially IOUs issued by governments and companies looking to raise capital. When you invest in a bond, you are lending the issuer your money for a set amount of time. During this period you are paid a fixed rate of interest and when the bond matures, you should get your capital back in full.

Bonds issued by the UK government are known as gilts, and after cash, are widely seen as one of the safest investments available.

If you are happy to introduce a bit more risk to increase the chance of making potentially higher gains, you might want to consider moving towards corporate bonds – where investors lend to companies in return for a (usually higher) fixed rate of interest. The increased risk is the danger of the company not paying the income each year or returning the loan on redemption.

If the company cannot meet its loan obligations to bondholders then investors lose their money. And, remember, corporate bonds, unlike bank deposits, are not covered by the UK’s Financial Services Compensation Scheme (FSCS). However by investing in a professionally run bond fund, your money will be spread across a basket of investments, which will help you to diversify the risk you take on.

Higher risk investments

If you have a strong appetite for risk and financial losses wouldn't cause you real hardship because you have other resources to fall back on, you might be prepared to look at the more risky investment opportunities, such as shares. However, don't venture into high risk investing without doing plenty research to ensure you really understand where your money is going.

Many first time investors like to stay close to home and invest in UK firms. Companies listed on the UK’s main index, the FTSE 100 are usually viewed as good starting point. Often referred to as ‘blue-chips’, these corporations tend to be far less likely to suffer large swings in volatility, at least in comparison to say smaller fledgling firms looking to expand rapidly. While the latter type of stock will potentially deliver higher returns, they also come with far more risk.

While firms listed in the UK, the US and Western Europe are referred to as developed market shares, if you want to take on more risk, with the aim of generating higher returns, you could look at investing in emerging market shares. These include firms based in developing countries, otherwise known as emerging markets, such as for example China, Russia, India and Brazil.

These young economies can offer impressive prospects for growth in the short-term as they go through their market boom periods. But, of course, the risk of losing your investment is much higher as a lot could go wrong. Investors have to remember that with all emerging markets, the economic backdrop is always volatile. Also, when you invest overseas in currencies other than sterling, changes in those currencies' values will affect the value of your investment, as well. If sterling rises against the local currency, your investment would start to lose money.

Mixing and matching

Think carefully about the range of investments you are considering before actually buying. Have you struck the right balance between fund sectors? What about investment types? Is there a good mix of equities, bonds, and cash?

The ideal mix should spread enough risk between investment types to reduce the chance of you losing some, or all, of your initial investment.

Find out more about how to build a diversified portfolio

Some investors choose to invest their money gradually, rather than making big lump sum investments. Slowly drip-feeding money in can mean that any movement in share price has less effect on the value of your investment.

Learn more about the benefits of regular investing

Spread your risk through funds

Funds provide a good way for smaller investors to gain easy access to a wide range of stocks and shares. Pooled investments such as unit trusts, Open-Ended Investment Companies (OEICs) or closed ended investment trusts are all options you might consider. A fund manager is responsible for choosing which shares to hold, and will usually focus on a particular sector or geographical area. As your money is invested in a wide variety of different shares, the risks are lower than if you invest in just a few.

Find out more about types of funds

Find out more about the funds available on our Research Centre

Fees for your investment (Stocks and Shares) ISA

Fees apply to all investment Individual Savings Accounts (ISAs). Bear in mind that providers charge differently to one another, so make sure you understand exactly how much you are paying before you invest.

Fees can vary for different types of investment too. For example, you may not be charged the same for including an investment trust in your ISA as you would for a unit trust or some shares or bonds. Our fees are transparent and easy to understand.

Find out more about our fees

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