Your ISA jargon buster
- Don’t let ‘ISA speak’ put you off - at its core an ISA is a tax wrapper designed to help you invest and keep more of your gains over the long term
- As the ISA is just the shell, the important part is choosing which assets to hold inside it
- Your money isn’t locked in, in a stocks & shares ISA. You can withdraw whenever you like but remember the value of compounding increases over time
The value of your investments and the income you receive from them can go up and down, and you may get back less than you invest. Any examples are for illustration purposes only. ISA eligibility and tax rules apply.
Duolingo is missing a trick. If the nagging owl really wants to get everyone flipping between languages, it could do with a course on translating investment speak into plain English. Judging by how many of us find all the industry jargon impenetrable at times, business would be booming.
Individual savings accounts (ISAs) would undoubtedly draw a crowd keen for translation, given they tend to come with a barrel-load of niche terms that often confuse us into inaction. Until ‘ISA’ is awarded its own language status, we’ll have to make do with our ISA jargon buster. Here are the most common head scratchers when it comes to investing in stocks and shares ISAs, as well as what they all mean without the jargon.
| ISA jargon | In plain English |
| Stocks & shares | Stocks: the general term for companies listed on an exchange for you to buy and sell. Shares: small parts of that stock i.e. you might own 10 shares of a company’s stock. You’ll often hear them used interchangeably, at least in the UK. |
| Stocks & shares ISA | An account that acts like a lunchbox for your investments. You won’t have to pay UK tax on any growth your investments achieve. |
| ISA allowance | We can all put £20,000 into our ISAs each tax year (April to April). This is your ISA allowance and it can be split across different types e.g. Stocks & shares ISAs and cash ISAs, and you can have multiple stocks & shares ISAs if you like. |
| ISA contribution/ISA subscription | When you put money into your ISA you might hear that called an ISA contribution or subscription. It’s just another way of talking about simply adding money into your account. |
| ISA portfolio | The bunch of assets in your ISA account. Stocks, bonds, funds - put it all together and that’s your portfolio. |
| Dividend/dividend income | Cash payouts some companies choose to give their shareholders. They come at regular intervals e.g. every six months, every quarter, and the company decides the schedule. |
| UK dividend tax | From 6 April 2024 to 5 April 2025, you can earn £500 in dividend payouts before you have to start paying UK tax. The tax only applies on amounts over the first £500 outside an ISA and the rate you pay depends on how much you earn in terms of wages/salary. Importantly, you don’t have to pay UK tax on any dividends you earn inside an ISA. |
| Income tax | Not to be confused with UK dividend tax, income tax is what you pay on earnings from your job. Again, what you pay depends on how much you earn. |
| Capital gains | When you buy shares and sell for a profit (not counting dividends) these are classed as capital gains. |
| Capital gains tax | Outside an ISA, we can make £3,000 in capital gains during the current tax year before any tax kicks in. Any profits above the allowance are taxed, with the rate you pay (you guessed it) based on how much you earn: 10% for basic rate taxpayers, 20% for higher or additional rate taxpayers, in the current tax year. Just like UK dividend tax, you don’t have to pay UK tax on any capital gains you earn inside an ISA. |
| Tax-efficient/tax-free | The UK tax authorities won’t dip into your ISA so it’s tax-free in that sense. But, when you hold US shares in your stocks & shares ISA, the US government taxes dividends at source through a withholding tax. This is 30% normally but UK residents can get it down to 15% if they fill in a W-8BEN form with their broker. It’s why you might see stocks and shares labelled tax-efficient rather than tax-free. |
| Risk vs volatility | In investing, risk is about weighing up the chances of an investment losing you money over the long term. Volatility is more about the day-to-day ups and downs you’ll naturally see in your portfolio. They are linked as different assets will carry different risk profiles (not all young startups make it and not all old school giants make huge returns) as well as showing different levels of volatility but they aren’t the same. |
| Withdrawals | Taking money out of your stocks and shares ISA is a massively misunderstood concept. You can take money out whenever you like, it’s just that the longer you give your investments time to compound the better, in general. But, your money isn’t locked up until a certain time, like it is in a pension. On that note, there is no tax on withdrawals from a stocks & shares ISA the way there could be in a pension. This is because the money you put into an ISA has likely come from your hard-earned income, which has already been taxed. Your pension savings come from your pre-tax income so they can be taxed on the way out instead, depending on how much you take out at a time. |
| Dollar/pound-cost averaging | A lot of people invest monthly, in line with when they get paid. If they are steadily investing in the same assets, they’ll naturally catch different share prices, both high and low, which average out over time. This is dollar/pound-cost averaging and is one method investors use to try to smooth portfolio volatility over the long term by not committing all their money at once. |
Important information
When investing, your capital is at risk. The value of your investments, and the income you receive from them, can go down as well as up and you may get back less than you invest. Forecasts aren’t a reliable guide to future results or returns.
Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information and does not constitute any financial advice. This is not an offer, recommendation, inducement or invitation to buy, sell, or hold any securities, or to engage in any investment activity or strategy.
Robinhood doesn’t provide tax advice. You should seek advice if you have any questions regarding the impact your investments will have on your income tax and tax filing requirements.
