A lead overlay design of a magnetic sensor is described with sensor and free layer dimensions such that the free layer is stabilized by the large demagnetization field due to the shape anisotropy. In one embodiment the giant magnetoresistive (GMR) effect under the leads is destroyed by removing the antiferromagnetic (AFM) and pinned layers above the free layer. The overlaid lead pads are deposited on the exposed spacer layer at the sides of the mask that defines the active region. In other embodiment a layer of electrically insulating material is deposited over the sensor to encapsulate it and thereby insulate it from contact with the hardbias structures. Various embodiments with self-aligned leads are also described. In a variation of the encapsulation embodiment, the insulating material is also deposited under the lead pads so the electrical current is channeled through the active region of the sensor and sidewall deposited lead pads.