Stocks and shares ISA explained

A stocks and shares ISA is a tax-efficient way to invest your money in the UK. It allows you to put your funds into a range of assets, such as shares, bonds, and investment funds, without paying UK tax on your returns.

How does a stocks and shares ISA work, what’s the risk, and how can you open an account? We explain everything you need to know about stocks and shares ISAs, as well as some alternative savings options you might want to consider.

Stocks and shares ISAs, also called investment ISAs, are a type of investment account with a tax wrapper. They allow you to invest without paying tax on the money you earn from income, capital gains, or dividends. 

Having a stocks and shares ISA means you’ll be investing in companies, government and corporate bonds and investment funds, rather than putting your money away into a savings account that provides more predictable returns and deposit protection via the Financial Services Compensation Scheme.

Stocks and shares ISAs can be volatile. You’ll be investing in the stock market, which, as we’ve experienced over the last decade or so, can go up as well as down. That means you could lose money on your original investment. You should typically be prepared to make a long-term investment, as this gives your stocks and shares ISA time to recover from drops in the market. Long term, you could stand to make significant gains, but there are no certainties.

With a stocks and shares ISA, you won’t pay income, dividend or capital gains tax on any returns you make on your investments. You can choose to have your ISA managed and pay for a fund manager to oversee investments on your behalf, or you can make your own decisions about where to invest your money depending on your comfort levels and understanding of markets. 

Adults in the UK have a tax-free ISA allowance of £20,000 per year (valid for the 2026/27 tax year, which runs until 5 April 2027).

The £20,000 allowance is a combined limit across all the ISAs you hold.You can either invest all your allowance in a stocks and shares ISA, or you can split it across different types of ISAs, including cash ISAs, innovative finance ISAs and lifetime ISAs.

Your stocks and shares ISA limit is the maximum you can pay into your account, rather than the total value of your investments. If you deposit your total allowance into a stocks and shares ISA and the stock market falls, the value of your investments could be lower than the amount you put in, and you won’t be able to make any further investments during the same tax year. If market conditions improve, then the value of your investments can start to increase. 

There are certain tax benefits that come with investing in stocks and shares ISAs. If you invest in a stocks and shares ISA, the returns you earn are protected from income tax, capital gains tax, and dividend tax. This is particularly useful if you’re an additional rate taxpayer and don’t qualify for the personal savings allowance (PSA), as you will pay tax on any interest earned outside of the ISA’s tax-free environment.  

You should be aware that moving pre-existing investments into your ISA may lead to a CGT charge, as your provider will need to sell and repurchase your investments as part of the process. If your investments have a higher value, and you have already used your allowance, you may face a charge.

While the tax-free status of stocks and shares ISAs is helpful in some circumstances, it’s worth noting that many people won’t pay tax on the interest they earn from a traditional savings account anyway. Thanks to the PSA, basic rate taxpayers can receive up to £1,000 in tax-free interest, while higher rate taxpayers can earn £500 without paying tax. Interest rates on savings accounts and fixed bonds do change, but can be fixed for certain periods and offer more predictable returns, and you won’t lose money due to market volatility. Before opening an account, consider whether it’s still worth putting your capital at risk in a stocks and shares ISA.

People who typically consider a stocks and shares ISA are focused on long-term savings goals  with no immediate need to access your money. You could get a higher return from a stocks and shares ISA than a cash ISA or a traditional savings account, but this type of investment carries risks and the value of your investments could go down as well as up. It’s important to understand all the pros and cons and ensure that you’re comfortable with the risk you’re taking, as well as all the potential outcomes.

A stocks and shares ISA will typically cost a similar amount to general investment accounts, although you will be expected to pay two different kinds of fees. There will be the charge from the financial advisor or investment platform, and for those buying funds, there will be the levy fees from the individual fund managers.

Different investment platforms charge different fees, which you'll still have to pay whether your investment makes any money or not. It's worth running a stocks and shares ISA comparison to look into the details and work out the best deal for you before committing to an account.

If you’re new to investing or don’t know how to choose the funds to invest in, an investment fund may be an option. A fund manager selects investments on your behalf, which can sometimes make a managed fund the best stocks and shares ISA for beginners. Your money will be pooled along with other investors’ money, and the fund manager chooses where that money goes.

It’s important to note that you’ll probably be charged a fee for an investment fund, which covers the cost of a fund manager and the investment platform. Different investment platforms charge different fees, which you’ll still have to pay regardless of whether your investment makes any money. Take time to understand the small print, including fees and charges, before committing to an account.

If, however, you have experience in investing and feel confident about controlling your stocks and shares ISA yourself, you can compare shares and funds, and choose the ones that are right for you. This is called a self-select stocks and shares ISA.

Stocks and shares ISAs can provide investors with strong returns, but it’s impossible to predict any potential returns because of the unpredictability of the stock market. This unpredictably means you may lose money too. According to some experts, the average return on stocks and shares ISAs over the past 10 years was 9.64%.* 

But even if you choose what has historically been the best performing stocks and shares ISA, past performance does not guarantee future results.

Returns aren’t guaranteed, and no one knows how much your investment will go up or down.It’s usually advisable to look at stocks and shares ISAs as long-term investments in order to increase your chance of profitable returns.

*According to https://www.unbiased.co.uk/discover/personal-finance/savings-investing/cash-isa-vs-stocks-and-shares-isa-what-s-the-difference.

When you invest in a stocks and shares ISA in the UK, the Financial Services Compensation Scheme (FSCS) protects your investments up to £120,000 per person, per authorised firm. This means that even if your stocks and shares ISA collapses, you will have up to £120,000 of your investments protected. However, it’s important to note that this protection only covers the failure of the firm holding your investments and does not apply to losses resulting from investment performance.

Like any financial investment, a stocks and shares ISA is not completely predictable. It can earn you money, and it can lose you money as the market shifts. If this is something you aren’t comfortable with, it could be worth exploring cash ISAs or savings accounts instead.

There are various routes to opening a stocks and shares ISA. You can open your account with a bank or building society, through a financial advisor, or with an online platform.

The application process is typically straightforward and can be completed in a few simple steps:

1. Compare your options: Research different platforms to find one with fees and investment choices that suit your needs.
2. Prepare your documents: You will typically need to provide your National Insurance number, proof of ID, and proof of address so your identity can be verified.
3. Complete the application: Fill out the online application form with your chosen provider. This can be done at any time during the tax year.
4. Fund your account: You can choose to invest a lump sum immediately or set up a direct debit to make regular monthly contributions.
5. Start investing: You do not necessarily need to invest right away. You can leave the money as cash within the ISA wrapper and watch the market until you feel comfortable selecting your investments.

When comparing a cash ISA to a stocks and shares ISA, the main difference lies in the level of risk and the potential for reward. A cash ISA operates much like a traditional savings account. Your money earns a predictable interest rate, and your original capital is secure, provided your bank is covered by the FSCS.

With a stocks and shares ISA, you invest your money in the financial markets. This means your returns are variable and depend entirely on the performance of your chosen investments. While investing offers the potential for higher long-term growth that could outpace inflation, it also means your capital is at risk and you could get back less than you put in.

If you have an existing cash ISA, you can transfer some or all of it to a stocks and shares ISA if you prefer. 

If you want to build a nest egg for a child's future, you might consider opening a junior stocks and shares ISA. These work in a similar way to adult investment ISAs but are opened and managed by a parent or legal guardian.

The Junior ISA allowance is £9,000, which is in addition to the adult ISA allowance. The money invested belongs entirely to the child. They can take control of the account when they turn 16, but they cannot make any withdrawals until their 18th birthday.

f you’re transferring from a stocks and shares ISA to a cash ISA or vice versa, or you simply want to access your cash, there are a few points to consider. Once you have your provider lined up, make sure that you fill out the ISA transfer form before withdrawing any money. If you simply withdraw without starting the process on paper, your cash will lose its tax-free status. Making the switch shouldn’t take more than 30 days.

If you don’t want to take on the risk of moving markets, it’s worth considering alternatives to stocks and shares ISAs. Fixed rate bonds, for example, provide a predictable return on your deposit over a set time, and typically offer competitive fixed interest rates. This means you’ll know exactly how much interest you’ll earn and how long your money will be locked away for.

While we don’t offer stocks and shares ISAs at Raisin UK, you can open a range of savings accounts.

Opening an account with Raisin UK is free, allows you to manage multiple accounts in one place, and offers competitive interest rates from a range of UK banks and building societies.