How Does a Stocks and Shares ISA Work?

What Is a Stocks and Shares ISA?

A stocks and shares ISA is a type of Individual Savings Account. It holds investments rather than cash. A cash ISA earns interest on the money you deposit. A stocks and shares ISA holds assets that can rise or fall in value, such as shares, funds, and investment trusts.

The “ISA wrapper” is what sets it apart from a standard investment account. Inside the wrapper, your investments are shielded from UK income tax and capital gains tax. Outside an ISA, dividends above the dividend allowance are taxed. Gains above the annual CGT exempt amount are taxed too. Inside an ISA, neither applies, however much your investments grow. That is why the answer to whether you pay CGT on shares in an ISA is a flat no.

The main differences between a stocks and shares ISA and a cash ISA are:

The £20,000 annual allowance is shared across all your ISAs. For example, if you put £8,000 into a cash ISA in a tax year, you can put up to £12,000 into a stocks and shares ISA that same year. Across both, the total cannot go above £20,000.

What can you hold inside a stocks and shares ISA?

A stocks and shares ISA can hold shares in listed companies, funds (unit trusts and OEICs), investment trusts, exchange-traded funds (ETFs), and government or corporate bonds. Cryptocurrency, physical gold, and most alternative assets are not permitted under current HMRC rules. The specific investments available depend on your provider.

HMRC sets out which investments are permitted. The main categories are:

• Shares in listed companies: Individual shares in companies quoted on a recognised stock exchange. This includes UK and many overseas markets.
• Funds: Pooled investment vehicles that hold a basket of assets. Examples include unit trusts and open-ended investment companies (OEICs). A fund manager buys and sells the underlying assets on your behalf.
• Investment trusts: Closed-ended investment companies listed on a stock exchange. They also hold a portfolio of assets. Unlike open-ended funds, they have a fixed number of shares and trade on the open market.
• Exchange-traded funds (ETFs): Funds that trade on a stock exchange like a share. Many ETFs track a market index rather than being actively managed.
• Government and corporate bonds: Debt securities issued by governments or companies. These can also be held inside a stocks and shares ISA.

Not everything is permitted. Cash in a stocks and shares ISA is generally held only temporarily. For example, it sits there between selling one investment and buying another. Cryptocurrency, physical gold, and most alternative assets are not permitted under current HMRC rules.

Two changes took effect on 6 April 2026. Long Term Asset Funds can now be held in a stocks and shares ISA and in a Junior ISA. Cryptoasset exchange traded notes went the other way. They are now restricted to Innovative Finance ISAs only. Existing holdings are grandfathered where they are already held.

How much can I put in a stocks and shares ISA each year?

You can contribute up to £20,000 per tax year across all your ISAs combined. This is the annual ISA allowance for 2026/27. The limit is shared across all the ISA types you hold. Unused allowance cannot be carried forward. It resets on 6 April each year.

Every UK adult gets one ISA allowance each tax year. For 2026/27, it is £20,000, running from 6 April 2026 to 5 April 2027. This is a total limit across all the ISAs you hold. That includes cash ISAs, stocks and shares ISAs, innovative finance ISAs, and Lifetime ISAs (up to £4,000 of the allowance, which comes out of the same £20,000). You cannot carry unused allowance into the next tax year. It is use it or lose it. The £20,000 figure is frozen until 5 April 2031.

From April 2024, HMRC changed the rules. You can now open and pay into multiple ISAs of the same type in one tax year. Before, you could only open one of each type per year. The £20,000 cap still applies across everything combined.

Here is one example of how the allowance can be split:

The allowance resets each tax year on 6 April. There is no minimum amount. You can contribute as little or as much as you like, up to £20,000.

Withdrawals do not restore your allowance. If you invest £20,000 and then withdraw £5,000, you cannot put that £5,000 back in the same tax year. You have already used your full allowance. Some providers offer “flexible ISAs”. These let you re-deposit withdrawn funds in the same year. This is a feature of certain accounts and providers, not a standard ISA rule.

What are the tax benefits of a stocks and shares ISA?

Inside a stocks and shares ISA, dividend income is exempt from UK income tax. Investment growth is free from capital gains tax, however large it is. You do not need to declare ISA income or gains on a Self Assessment tax return. This tax protection applies for as long as the money remains inside the ISA wrapper.

The main benefit of a stocks and shares ISA is the tax treatment. Inside the ISA wrapper, two major taxes do not apply:

• No income tax on dividends: When companies pay dividends to shareholders, that income is normally subject to income tax above the dividend allowance (£500 in 2026/27). Inside a stocks and shares ISA, dividend income is exempt from income tax, however large it is.
• No capital gains tax on growth: If you sell an investment that has risen in value, the profit is normally a capital gain. Outside an ISA, gains above the annual CGT exempt amount (£3,000 in 2026/27) are taxed at 18% for basic-rate taxpayers and 24% for higher and additional-rate taxpayers. Our Capital Gains Tax guide sets this out. Inside a stocks and shares ISA, there is no CGT on any gain, however large.

You also do not need to declare ISA income or gains on your Self Assessment tax return. The ISA wrapper handles the tax treatment automatically.

What the ISA does not shelter you from:

• Withholding tax on overseas dividends: Some foreign companies deduct tax at source before paying dividends, including to ISA holders. This is a foreign tax, not a UK tax. The ISA does not protect against it.
• Stamp duty: When you buy UK shares inside an ISA, you still pay 0.5% stamp duty reserve tax on the purchase. The ISA does not exempt this.

All ISA tax rules are set by HMRC. The current rules are published at gov.uk/individual-savings-accounts.

What changes for stocks and shares ISAs from April 2027?

Nothing changes in 2026/27. Two changes are already announced for 6 April 2027. Both are worth knowing if you tend to leave money sitting as cash in your investment account.

• A 22% charge on cash interest. From 6 April 2027, a flat-rate 22% charge applies to interest paid on cash held inside a stocks and shares ISA or an Innovative Finance ISA. This also covers the equivalent alternative finance return. Whatever the base rate is doing, uninvested cash in an investment ISA will no longer be a tax-free way to earn interest.
• Wholly cash-like portfolios stop being eligible. A stocks and shares ISA made up entirely of cash-like holdings will not qualify from that date. Money market funds are allowed only as a partial holding. Transfers from a stocks and shares or Innovative Finance ISA into a cash ISA are also blocked from 6 April 2027. Savers aged 65 and over are exempt from that transfer restriction. Moving money from a cash ISA into an investment ISA remains allowed.

Neither change touches the core tax treatment. Dividends and capital gains on investments inside the wrapper stay exempt. Separate tax rate rises on income held outside a wrapper do not apply to income earned inside an ISA either. Dividend tax rates already rose by 2 percentage points on 6 April 2026. They are now 10.75% at the basic rate and 35.75% at the higher rate. The additional rate is unchanged at 39.35%. Property and savings income rates rise by 2 percentage points on 6 April 2027.