A stocks and shares ISA is just that – a tax-efficient way to invest in stocks and shares.

Whilst the government offers tax-efficient options on savings in a cash ISA – they recognise that some people prefer to invest in other ways, and so to encourage everyone to do something – they rolled the tax benefits across both.

Because of the tax benefits, there are limits on how much you can invest:

• up to £7,200 in each tax year for a stocks and shares ISA
• or up to £3,600 of that allowance can be saved in cash with one provider, the remainder of the £7,200 can be invested in stocks and shares.

Once you’ve chosen a stocks and shares ISA and who you want to buy it from, the next step is to choose which funds you would like to invest in. You can then hand over the day to day management of the fund(s) to the fund manager who is an expert and will work hard to get the best returns.

If you feel more adventurous and prefer to manage your stocks and shares on a more active basis you can choose to switch between the funds offered.

Pros

• You won’t pay any personal UK income tax or capital gains tax on any growth or on any income you receive.
• Your money is invested in stocks and shares which, over the long term, provides the potential for greater returns than a cash ISA or a savings account.
• You usually have easy access to your money.
• How and when you add money is up to you – you can make a one-off payment or regular payments.
• You can usually get your money out within seven days of asking for it.
• You can choose a managed ISA or make the investment decisions yourself.
• You have access to experienced fund managers who invest on your behalf.

Cons

• You are currently limited to £7,200 investment per tax year.
• As with all investments in stocks and shares, and unlike a cash ISA or savings account, your investment can go down as well as up and you might not get back the amount you invested.
• The HM Revenue & Customs set the rules on ISA tax efficiency. They can change or remove these at their discretion.

This could be a great option for investors who are prepared to take more risk with their money for the potential of a bigger return, and who can afford to leave their money invested for a number of years. This is because the value of the stocks and shares held by the ISA can go up or down as can the income and/or dividends they pay. By leaving your investment for a longer term you are more likely to give your money chance to grow - but there are no promises, so make sure you are aware of the risks before you sign up.

If you’re not prepared to take any risk with your money but still want to benefit from tax-efficient savings, then a cash ISA could be right for you.

Most banks and building societies offer ISAs, as do many other financial and non-financial companies. You can buy them yourself without any advice either in the bank or building society, over the phone or online. As this is a more risky investment than a standard savings account or cash ISA, if you’re not sure get advice – either from the provider, or for an independent view, from a financial adviser who looks at the whole market.

Consider using your annual ISA allowance – make sure you use your full ISA allowance in each tax year to maximise the potential for tax efficient returns.

Get advice – investing in a stocks and shares ISA is more risky than a building society savings account or cash ISA and you should get advice before buying.

Don’t put all your eggs in one basket – investing is about spreading it around, look for fund(s) that will give you a balance of investments.

Tax year – runs from 6 April – 5 April the following year.