What Is a Stocks & Shares ISA?

How does a Stocks & Shares ISA work? 

What “tax-free investing” actually means 

When you invest through a Stocks & Shares ISA, any returns you make are sheltered from UK tax. While investment values can obviously rise and fall, the key benefit is that the government does not tax your capital gains or income. This tax-free treatment applies for as long as the investments remain within the ISA wrapper.  

Specifically, you will not pay Capital Gains Tax (CGT) on any growth when you sell investments, no dividend tax on income from shares or funds, and no Income Tax on interest earned from bonds or UK government gilts. This allows investors to reinvest income and benefit from long-term compounding, in accordance with HM Revenue & Customs rules. 

How this differs from investing outside an ISA 

Investing via a Stocks & Shares ISA differs from investing outside of an ISA in several ways.  

When you invest outside an ISA, the most common way to do so is through a General Investment Account (GIA). Unlike ISAs, GIAs do not offer tax protection. Profits you make when selling your investments will be subject to Capital Gains Tax above the annual Capital Gains Tax Allowance, which is capped at £3,000 a year.   In addition, if you receive dividends from your investments held in a GIA account then any dividend amount above the annual dividend allowance of £500 will be taxable.  

Any interest earned through bonds or cash-like investments held in a GIA may also be subject to Income Tax, depending on your personal allowances and tax band. 

Stocks & Shares ISA are available to any UK tax resident over the age of 18.  

Eligible individuals are entitled to invest up to £20,000 per tax year, with each tax year starting on 6th April and ending on 5th April the following year. However, this £20,000 allowance is shared across your ISA accounts, not just your Stocks & Shares ISA. 

If a UK taxpayer moves abroad after opening a Stocks & Shares ISA, they can retain access to the account but can’t deposit any more money until they are domiciled back in the UK. 

What can you invest in through a Stocks & Shares ISA? 

Despite their name, stocks and shares ISAs allow you to invest in a range of different financial assets, not just stocks and shares.  

Shares 

The holder of a Stocks & Shares ISA can invest in shares of individual companies both in the UK and internationally, also known as equities. This allows the investor to be exposed to international investment opportunities and diversify their portfolio, gaining global exposure.  

UK shares are usually listed on the London Stock Exchange, while international shares will be listed on other exchanges like the New York Stock Exchange or NASDAQ.  

Shares represent ownership in a company, and returns come from a combination of share price growth and, when the invested company performs well, dividend payments. Both of these returns on your investment are tax-free when held in a Stocks & Shares ISA. 

Funds 

Funds let you invest in a diversified mix of assets through a single investment, helping spread risk across companies, sectors, or regions.  

Within a Stocks & Shares ISA, the most common types of fund are OEIC (Open-Ended Investment Companies) and unit trusts. Both pool investors' money and issue units or shares based on the value of the underlying investments, which rise or fall in line with market performance.  

Funds can be divided into two categories, active and passive.  

• Active funds are managed by a fund manager who selects investments with the aim of delivering returns that outperform the investor's chosen index or stated benchmark. Fund managers work with a team of analysts and researchers to actively buy, hold, and sell stocks in line with market conditions to meet investors' expectations. When selecting funds it’s best to look at their long-term track record across a variety of market conditions to see who is best suited to the investor's financial goals. 

• The main goal of passive funds is to deliver a return in line with the market; they do not have to outperform it, only match the market they track. One of the most widely followed indices is the FTSE 100, which tracks the UK's largest 100 publicly listed companies by market capitalisation. A FTSE 100 tracker fund aims to replicate this index by investing in all 100 companies in proportions that reflect their relative sizes. As a result, the fund's value rises and falls in line with movements in the FTSE 100. As passive funds tend to track indexes rather than be actively managed, they have lower costs, including reduced trading costs, which can be as low as 0.1%. 

ETFs 

An Exchange Traded Fund (ETF) is a basket of securities that trades on an exchange, like a stock. They can be structured to track an index, sector, commodity, or group of assets and sold throughout the day at market prices, offering flexibility and broad market exposure. 

ETFs can come in two principal share classes:  

• ‘Income’ (also known as ‘distributing’) 

• ‘accumulation’.  

Income share classes pay income to investors, whilst accumulation share classes automatically reinvest any income, such as dividends and interest, back into the fund to grow investors' capital through long-term compounding. 

One of the main advantages of ETFs is their cost. Because most ETFs are passively managed and track an Index, such as the FTSE 100, ongoing charges are usually lower than those of actively managed funds. 

Bonds and gilts 

Bonds are a type of loan in which bondholders lend money to a company or government. The bondholder recoups their investment through regular interest payments until a future date, after which the initial loan amount is repaid. The final amount paid back to honour the initial loan is called the ‘principal’, and the interest is called the ‘coupon’.  

Within a Stocks & Shares ISA, bonds can help diversify a portfolio and provide a more balanced investment approach, particularly during periods of market volatility.  

Investors can either buy individual bonds or invest in a bond fund. Individual bonds pay a fixed rate of interest and return the original capital at maturity. Bond funds hold a range of bonds and do not offer a fixed end date, with prices fluctuating as interest rates and market conditions change. 

Gilts are bonds issued by the UK government to raise money for public spending or state projects. Investors buying gilts are essentially lending money to the British government, and are paid interest at a fixed rate twice a year until the gilt matures and the loan is repaid in full. 

What you cannot invest in?

While a Stocks & Shares ISA offers you access to a wide range of investments, there are some restrictions on what they can hold.  

Buy-to-let and commercial properties can’t be directly held in these ISAs, although investors can invest in funds that hold property if they’re keen to gain exposure to property-related investments.  

ISAs also can’t hold unregulated collective investment schemes, which fall outside UK regulatory protections, or unlisted shares, which can’t be held since they aren’t traded on an exchange.  

Derivatives also fall outside the remit of a Stocks & Shares ISA, including contracts for difference (CFDs) and spread bets, due to their risk profile and complexity.  

Finally, cryptocurrencies can’t be held within a Stocks & Shares ISA, although at present you can invest in them indirectly via exchange-traded products (ETPs). But this will change on 6th April 2026, after which they’ll be reclassified as qualifying investments for Innovative Finance ISAs and will no longer be accessible in a S&S ISA. 

How much can you put into a Stocks & Shares ISA? 

ISA allowance rules 

Across all ISA types, the combined annual allowance is currently £20,000 per tax year, which runs from 6th April to 5th April. 

Can you have more than one Stocks & Shares ISA? 

Since a rule change introduced in April 2024, you can now hold multiple ISAs of the same type, such as two Stocks & Shares ISAs or three cash ISAs.  

This change matters because it allows investors to spread their money across different providers and follow different investment strategies, while still retaining their tax-free status. For example, an investor could use one ISA for long-term growth investments while another could take advantage of income-focused assets. 

However, it’s important to remember that the total ISA contribution limit per tax year is £20,000 across all those ISAs combined, not per ISA. 

What happens if you exceed the allowance? 

If you exceed the annual £20,000 allowance across all ISA types, HM Revenue & Customs HMRC) should identify the issue during its end-of-year reconciliation process.  

It’s important to keep track of your ISA contributions in order to make sure you don’t exceed the annual allowance, as this can lead to administrative complications as well as the loss of the tax-free status on the excess funds. 

ISA providers report ISA contributions directly to HMRC, so excess payments are reported automatically rather than requiring self-reporting. If you exceed your £20,000 ISA allowance, HMRC will contact you with instructions on the next steps, including guidance on removing the surplus funds from the account.  

Can you have a Cash ISA and a Stocks & Shares ISA at the same time? 

Yes, you can have a Stocks & Shares ISA alongside a Cash ISA, and it’s very common to have both because it means you can manage short-term and long-term savings goals simultaneously.  

How to split your allowance strategically 

There are various ways you can strategically allocate your ISA allowance across different ISA types to meet different financial goals.  

Stocks & Shares ISA vs Cash ISA

Risk vs return 

Cash and Stocks & Shares ISAs each have distinct advantages, but each also has its own downsides.  

Cash ISAs offer capital protection, meaning the value of your savings doesn’t fall, and returns are generated by interest paid by the provider. However, returns may struggle to keep pace with inflation, making it a more suitable choice for shorter-term saving goals. 

Stocks & Shares ISAs require funds to be invested in the market and, in turn, leave them exposed to market volatility. The market can either rise or fall, and returns are not guaranteed. However, although there is a risk that the value of your investments may fall lower than the amount you deposited, over the long term investing through an S&S ISA has the potential to deliver higher returns than a Cash ISA. 

Time horizon matters 

Timescales for both Cash and Stocks & Shares ISAs can vary from person to person, but as a general rule of thumb Cash ISAs are more likely to suit people with shorter-term saving goals, especially if access to cash is imperative within the next few years, meaning stability and liquidity are more important than growth. 

Stocks & Shares ISAs are likely to be a more suitable option for people who don’t need short-term access to the money and are comfortable locking away their funds for extended periods, such as 5 years or more. This allows for the investments to weather market volatility and mature; returns are not guaranteed.  

Stocks & Shares ISA vs Cash ISA 

Stocks & Shares ISA vs pension (SIPP) 

Tax treatment 

Both Stocks & Shares ISAs and Self-Invested Personal Pensions (SIPPs) allow you to grow your money in a tax-efficient way, allowing you to invest in shares, funds and bonds and earn tax-free returns if those investments rise in value.  

The key difference between the two is that with an ISA, there is no relief on contributions, as money is invested from post-tax income. Instead, the tax benefits come when funds are withdrawn from the ISA. For example, if £10,000 is invested in an S&S ISA and it grows by 25%, the full £12,500 can be withdrawn tax-free.  By contrast, pension tax relief occurs when funds are deposited into a SIPP rather than when they’re withdrawn. A £10,000 gross pension contribution would actually only cost a basic-rate taxpayer £8,000 after tax relief, with the remaining £2,000 added by the government. However, when the money in that SIPP is withdrawn after you reach retirement those withdrawals will be liable for Income Tax. The advantage with this approach is that many people have much lower income levels in retirement than they did when they were working, which means they’re more likely to benefit from a lower Income Tax rate. 

Access rules 

One of the main differences between an ISA and a pension is when you can access the money. 

With an ISA, funds can be withdrawn at any time and with no age restrictions on when this can be done (with the exception of a Lifetime ISA, where you need to either be over the age of 60 or be preparing to buy your first home in order to access those funds without penalty).  

By contrast, pensions are designed for retirement and come with a minimum age at which an individual can access their funds. Currently, the current minimum age for access to the funds in a personal pension is 55, although that’s set to rise to 57 in April 2028. 

When using both makes sense 

Using both an ISA and a pension can provide a balanced and flexible approach to saving and investing. A cash ISA offers modest returns coupled with easy access to your money, while a Stocks & Shares ISA allows an investor to grow their capital over a longer period whilst retaining the ability to withdraw those funds when needed.  

A pension remains the most tax-efficient vehicle for saving for retirement, primarily because contributions provide immediate tax relief. Additionally, the age restrictions on accessing a pension help to ensure that the funds within are used for retirement.  

ISA vs Pension 

What are the risks of a Stocks & Shares ISA? 

Market risk 

The main risk associated with a Stocks & Shares ISA is the market volatility to which an investor's funds are exposed. Short-term losses are a normal part of the investment process, particularly during volatile periods, but it’s those same market dynamics that mean Stocks & Shares ISAs have the potential to offer higher returns than cash ISA over longer timeframes. 

Still, there are no guarantees that the investment will be worth more than you paid into it when you come to sell it.  

Behavioural risk 

In addition to market movements, an investor’s behaviour can drastically change the performance of their investments. Some examples include panic selling during market downturns, trying to time the market, or chasing a recent high-performing investment, which can all result in losses or missing potential recoveries. 

Concentration risk 

Concentration risk occurs when an investor's portfolio isn’t diversified, with too much emphasis on a single asset class, sector or market. If that single investment type performs poorly, then it can disproportionately impact the value of the overall Stocks & Shares ISA.  

Diversification helps reduce this risk by spreading investments across different companies, regions, and asset types. Holding a mix of assets, rather than focusing on a single stock or theme, can help mitigate underperformance. 

Platform vs investment risk 

Platform risk relates to the operation of the investment provider itself, and this can range from administrative errors to the outright failure of the provider. Platforms are regulated, and client assets are held separately from their own business assets, which means that if the provider were to go bust, the investors' assets should be ringfenced.  

There aren’t the same protections when it comes to investment risk, which relates to the possibility that the value of the investor's holdings might be negatively impacted by market movements, company performance or economic conditions. This risk is always prevalent regardless of which provider an investor chooses to invest their funds with. 

What protection does a Stocks & Shares ISA have?

FCA regulation 

All Stocks & Shares ISA providers in the UK are regulated by the Financial Conduct Authority (FCA), which outlines strict standards about how those firms operate, safeguard client assets and treat customers.  

FCA rules require providers to follow clear codes of conduct and disclosure requirements, ensure money and investments are held appropriately, and provide transparent information about risks and charges. All of this helps to ensure that ISAs operate within a regulated and supervised framework. 

FSCS protection 

Stocks and Shares ISAs are protected by the Financial Services Compensation Scheme (FSCS) up to £85,000 per person, per financial institution (an update to the FSCS in December 2025 means cash deposits are now protected up to £120,000, but that revised amount doesn’t apply to Stocks & Shares ISAs).  

FSCS protection means in the rare instance that an investor's chosen ISA provider or fund manager goes bust, the ISA holder would be covered up to that amount.  

However, this does not mean that the investments are protected from market fluctuations, which can adversely impact the value of the stocks should there be a market downturn. 

What protection does not cover 

Whilst the FSCS offers robust protection should an ISA provider or fund manager go bust, these protections are designed to address provider failure or misconduct and not investment failure.  

This means that FSCS protection does not cover:  

• market losses resulting from a fall in share prices 

• poor investment choices 

• timing-related losses 

• inflation risk 

• overseas market or currency movements impacting international investments. 

How dividends work in a Stocks & Shares ISA 

Dividends are tax-free 

Dividends paid on shares or funds that are held within a Stocks & Shares ISA are completely tax-free. The normal dividend allowance doesn’t apply in this case, which means an investor does not pay dividend tax on income received inside a Stocks & Shares ISA, regardless of the amount paid out or the investor’s tax band.  

Reinvestment vs income 

Dividends earned within a Stocks & Shares ISA can be either reinvested or taken as income, depending on the investor's preference and the investments held.  

Many providers offer a Dividend Reinvestment Plan (DRIP), which automatically reallocates the dividends to buy more shares or fund units. This can maximise the effects of compounding, as reinvested dividends have the potential to generate further returns over time. 

Alternatively, dividends can be paid out as cash, which may suit the investor if they are looking for a regular flow of income. Choosing between reinvestment and income depends on the financial goals of the investor, whether that is long-term compounded growth, or a combination of growth and income. 

Yield vs growth 

When investing in a Stocks & Shares ISA, it’s important to distinguish between income (yield) and growth strategies. Income-focused strategies aim to generate regular payouts through dividends or interest, which can be taken as cash or used to supplement earnings. These strategies often prioritise assets with higher yields, such as dividend-paying shares or income funds. 

Growth-focused investments reinvest income back into the portfolio, building value over time through compounding. This is commonly done through accumulation funds or ETFs, where dividends are automatically reinvested. The choice between yield and growth typically depends on the investor's objectives.  

Are Stocks & Shares ISAs worth it? 

When they make sense 

Stocks & Shares ISAs could be a suitable option for individuals who are looking to grow their wealth over the long term and aren’t likely to need access to any of that money within the next few years.  

Because investments can rise and fall in value, they are best suited to those willing to keep their money invested on a long-term basis and to accept the risk of market volatility, which can cause investment values to fluctuate.  

The key benefit of an S&S ISA is that it allows investors to grow wealth over the long term in a tax-efficient manner. Any gains, income or reinvested returns remain tax-free whilst held within the ISA, allowing for compounding to work without being eroded by tax. 

When they may not 

A Stocks & Shares ISA might not be the right option if there’s any possibility you might need access to some or all of those funds on relatively short notice.  

Since the money you invest through an S&S ISA is subject to market fluctuations, withdrawing money at short notice could crystallise losses if you have to sell your investments during a downturn.  

Beyond these liquidity considerations, this type of ISA also might not suit people with low risk tolerance, especially if market fluctuations in investment values are likely to cause stress or lead to kneejerk decisions.  

Using alongside other ISAs 

Investors may want to use both a Cash and a Stocks & Shares ISA, ensuring they have easy access to cash for stability alongside investments with growth potential. By splitting the annual £20,000 allowance across both ISA types, investors can grow their money in line with different financial goals simultaneously.