Finding investments for my investment ISA

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 2023-24 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 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’s suitable for you. You should bear in mind that investments can fall in value as well as rise, and 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 capital gains tax (CPT) allowance, which is £6,000 in the 2023-24 tax year. Profits above this will be taxed at 10% or 20% depending on your tax band. Other rates apply for a residential property. When you invest in an ISA, even if the profit you make is above this £6,000 threshold, you won’t have to pay CGT.

Similarly, the first £1,000 of dividends earned from investments held outside an investment ISA, are tax-free. This is known as the dividend allowance. If you go over this threshold, you'll 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) lets basic-rate taxpayers earn up to £1,000 interest in savings income a year tax-free, or £500 for higher-rate taxpayers. Additional rate taxpayers don’t have 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 thinking about your investments, and anticipating returns, you'll stand a better chance of success if you know at the start 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 something more immediate, like a house extension? Your own reasons for investing will determine how long you’ll want to keep your money invested for.

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’re prepared to accept. If, for example, you’re saving up for school fees that you’ll 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 ‘I-owe-you’ notes issued by governments and companies looking to raise money. When you invest in a bond, you’re lending the issuer your money for a set amount of time. During this period, you’re paid a fixed rate of interest and when the bond ‘matures' (this is when that set amount of time comes to an end), 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're 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 can’t meet its loan obligations to bondholders, then investors lose their money. And remember, corporate bonds, unlike bank deposits, aren’t 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 several 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 available, you might be prepared to look at riskier investment opportunities, such as shares. However, don't go into high-risk investing without doing plenty of research to make sure you really understand where your money is going.

Many first-time investors like to invest in UK firms. Companies listed on the UK’s main index, the FTSE 100, are usually viewed as a 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, newer 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 – 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 will start to lose money.

Mixing and matching

Think carefully about the range of investments you are considering before actually buying. Do you  have a good 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 adding 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 in our Research Centre

Fees for your Investment (Stocks and Shares) ISA

Fees apply to all investment ISAs, and providers charge differently to one another, so make sure you understand exactly how much you’re 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. 

Find out more about our fees