What is a stocks and shares ISA, and how does it work?

If cash savings aren’t delivering the returns you want, it might be worth considering a stocks and shares ISA.

Similarly, if you’d like to start investing in the stock market, this kind of ISA is a good first step.

This guide shows you how they work and gives an overview of some of the popular investment options.

Whether you're a beginner or a more experienced investor, here’s what you need to know about stocks and shares ISAs to get started.

What is a stocks and shares ISA?

An individual savings account (ISA) is a tax-efficient savings wrapper. Interest or growth from an ISA isn’t subject to tax in the way that ordinary savings or investments would be.

ISAs may, therefore, deliver more reliable long-term growth than traditional savings and investment accounts.

You can save up to £20,000 a year into ISAs, which is known as your ISA allowance.

This can be spread across cash and stocks and shares, but it’s important to note that from April 2027, the maximum that under-65s can save in cash will be reduced to £12,000 (the overall £20,000 limit isn’t being reduced).

A stocks and shares ISA holds investments instead of cash. Despite the name, it can hold a wider range of investments than just stocks and shares, and may include bonds, investment funds, investment trusts, as well as exchange-traded funds (ETFs).

Typically, you choose an ISA provider, who then offers you a range of investment options to choose from.

Depending on your provider, this may include ready-made portfolios for investors who don’t want to choose their own investments.

How do stocks and shares ISAs work?

When setting up your stocks and shares ISA, you can choose what investments to place inside it.

This is a critical step that determines both the risk level and potential growth of the ISA.

Although many ISA providers will provide you with lots of information and guidance to help you make appropriate choices, it may make sense to get financial advice if you are unsure.

When you invest in a fund via your ISA, you will purchase units (essentially your share of the fund), which will go up and down in price depending on the price of the underlying assets each day.

So if a fund unit costs £1, you could purchase a thousand units for £1,000. If the price of a unit rises to £1.20 a few months later, your investment will now be worth £1,200.

If it drops to 80p per unit, then you’ll have £800, and so on.

What are the benefits of a stocks and shares ISA?

The obvious benefit of a stocks and shares ISA is that it allows you to invest in a range of investments without paying capital gains tax (CGT) on the growth, which you might otherwise have to do if you exceed your CGT allowance.

This can be particularly useful if you’ve made other capital gains elsewhere in that year, such as by selling a second property.

Selling a large asset like this can wipe out your CGT allowance, so holding other investments in an ISA can protect that growth from tax.

If any of your investments pay regular dividends, an ISA will shelter you from dividend tax too.

Investment flexibility and tax efficiency

A stocks and shares ISA is also a great introduction to investing in general.

Remember, your ISA is simply a vehicle for investment, rather than a type of investment, so you’ll have plenty of choice regarding your assets.

You can get a feel for how different types of investments behave over time, and how to judge the right level of risk for you.

Additionally, if you already hold investments (including funds or shares) in a trading or general investment account, you may also be able to transfer them into a stocks and shares ISA using the ‘Bed and ISA’ process.

This involves selling your existing investments and immediately rebuying them in your ISA. You just need to make sure that you have enough ISA allowance remaining for the year and ensure you don’t move so much that you trigger a capital gain.

Another clear benefit of a stocks and shares ISA over a cash ISA is that the potential for growth is higher.

A cash ISA is limited by the interest rate offered, and if the Bank of England base rate is low (as it was years ago), your account may pay little interest.

In this case, your interest rate may not beat inflation, so the real value of your savings may actually diminish over time.

Furthermore, the personal savings allowance means that the first £1,000 of interest on cash savings is tax-free (or £500 if you pay higher rate tax). If you’re an additional-rate taxpayer, you have no personal savings allowance.

It’s worth stressing that tax on interest held outside of an ISA will rise by 2% from April 2027.

However, as interest rates have risen alongside the base rate, more people have been worried about paying tax on their interest.

By contrast, a stocks and shares ISA offers the potential for actively growing your money over time to beat inflation while saving you tax at the same time. Of course, this comes with an increased level of risk, which we’ll cover next.

What are the disadvantages of a stocks and shares ISA?

Stocks and shares are considered higher-risk or ‘volatile’ assets. This is because their value can rise and fall over time.

This means that the value of any investment in the stock market can go down and up, and a market crash could result in heavy losses.

Risk and investment horizon

For this reason, equities are not recommended as a short-term investment. Although you can get quick access to your money if you need it, it’s generally recommended that you don’t invest any money that you are likely to need within the next five or even 10 years.

This should give you enough time to ride out any short-term volatility in the stock market and increase your chances of a positive long-term return.

Ideally, you will want to plan any withdrawals carefully so that you sell at a time when your investments are doing well. If you aren’t sure, it’s worth talking to a financial adviser.

As for other disadvantages, the ISA limit of £20,000 per year restricts the amount you can put away.

If you have a lot of money to invest, you’ll have to look at less tax-efficient alternatives in the short term and drip-feed your money into ISAs

However, you may decide to use all your ISA allowance for stocks and shares and put your cash into regular savings accounts instead.

Should I invest in a stocks and shares ISA?

A stocks and shares ISA can be a great vehicle for saving for mid to long-term goals.

If you have money you are confident you can put away for several years without touching it, then a stocks and shares ISA will, in most cases, deliver better value than cash savings.

Stocks and shares ISAs can be particularly sensible choices for junior ISAs, because the child won’t be able to access their investment until they are 18.

This is a very good length of time for stock market investment, and historical growth over similar periods has almost invariably beaten inflation and cash savings.

Though still vulnerable to stock market falls, a junior ISA containing stocks and shares is generally a better choice than a cash one, especially if saving starts when the child is still a baby. 

Long-term goal planning

Stocks and shares ISAs can also be good for saving up for long-term goals, such as buying a home or later life.

You can use a lifetime ISA for these goals (which may be either cash or stocks and shares), but these have some restrictions, so some savers may prefer a standard stocks and shares ISA.

It’s also important to note that for dedicated retirement saving, a pension is likely to be more tax-effective than a stocks and shares ISA for most people.

This is because tax relief on contributions is likely to outweigh other benefits of ISAs.

It is worth bearing in mind that a cash ISA is not risk-free. With cash, you risk missing out on growth, or your money losing value due to inflation.

This is something to consider when weighing up the risks and rewards of the different types of ISA.

How to buy a stocks and shares ISA 

To open a stocks and shares ISA, you’ll need to decide how much you want to invest.

Remember that you can currently invest up to £20,000 of tax-free money into an ISA, so decide what proportion of that amount you’d be happy investing (or can invest).  

You then need to select a platform or provider to open your ISA.

You can choose what stocks and shares you want to invest in, use an expert to take care of this, or potentially pick from a pre-set ISA with a set number of investments. 

If you choose to pick your investments, you should pay close attention to additional fees that you will need to pay when carrying out your investments.

Platforms and providers will charge fees, meaning you could end up with less than you had originally calculated.  

Robo stocks and shares ISAs

Some ISAs may not even need any manual intervention at all. So-called ‘robo-ISAs’ rely on complex algorithms and artificial intelligence to make investment decisions for you.

Robo-ISAs are not cheap, but based on your criteria and risk profile, they will generally include predictable investment strategies, meaning you only need to pay attention to your returns.

Who provides stocks and shares ISAs?

Many well-known banks and large investment companies offer stocks and shares ISAs. If you want to keep the fees low, a cost-efficient option could be to use an online platform.

If you’re a confident investor, you can opt for a DIY trading platform, which will offer you little to no direction or guidance and usually has lower fees.

Popular options include Moneyfarm and interactive investor.

There are also platforms that can offer advice and fully managed investment options that decide where to invest on your behalf.

However, you will generally have to pay higher fund manager charges if you go for a fully managed option, which can reduce your returns.

Wealthify and Hargreaves Lansdown are some of popular options.

How to pick the best stocks and shares ISA provider

You’ll need to do your own research before choosing a provider, as each option has different pros and cons.

The cheapest option won’t always be the right one for you.

Make sure you’re considering factors such as:

• The choice of investment options

• Availability of ready-made investment options

• The annual platform charge

• Ease of use

• Research and tools

• The learning resources and guidance available

• Transfer out fees

• Account closure fee

• Fund dealing charge

It’s also sensible to consider how easy your chosen platform is to use.

If you’re going to be regularly trading, an easily accessible app will make it simpler for you to do so, while platforms that automatically reinvest dividends will suit passive investors looking for good returns.

A comparison website will make it easy to compare stocks and share ISA options if you know what you’re looking for.

There’s no one-size-fits-all stocks and shares ISA, so getting impartial advice from a financial adviser can make your investment journey easier.

They can help you pick the right investments for your circumstances and manage your portfolio on your behalf. 

What should I invest in with my stocks and shares ISA?

You can invest in whatever you like, but the first thing you should consider is what you’d like to achieve through investing.

Is stability a priority, or are you happy to risk losses in exchange for the chance of higher returns? Are you investing for a specific purpose (such as retirement or to build a nest egg for your children), or are you trying to make your money work harder than a savings account?

Next, think about the impact you want your investments to have. Are you driven by ethics and wish to support other companies/causes that share your ethos, or are other factors more important to you?

You’ll also need to consider how much work you’re willing to put into managing your funds and how long you’re happy to tie them up for.

Again, if you’re not sure, it’s best to get advice before investing – making ill-informed investments could be a costly decision.

What are the best stocks and shares ISA funds in 2025?

Here’s a quick snapshot of 10 of the most popular funds as of November 2025 with three-year returns, which could be invested in via a stocks and shares ISA.

It’s also important to note that returns are not guaranteed and that higher returns go hand in hand with greater risk. The best performing funds of 2025 may include options that aren’t appropriate.

The right choice for you will depend on your circumstances, goals and attitude to risk. But, as a guide, the longer you have before you’ll need your money, the more risk you can usually afford to take. 

Again, a financial adviser can help you with this decision, as they will have seen different funds perform over a full market cycle.

Stocks and shares ISA FAQS

How do I withdraw money from a stocks and shares ISA?

You’ll be able to withdraw money via your chosen platform.

If you don’t have any available funds, such as dividend payments, in your ISA, you’ll need to sell some or all of your investments to access the money.

How many stocks and shares ISAs can I have?

You can open and pay into more than one stocks and shares ISA each tax year.

If you see a better deal, you can open a new stocks and shares ISA.

Can I invest for my children?

Yes. Parents or legal guardians can open a junior stocks and shares ISA on their children’s behalf. They work in the same way as adult stocks and shares ISAs.

The tax-free allowance for junior ISAs is currently £9,00 a year.

Can I invest in foreign companies?

You can’t hold foreign currency in your ISA. However, you may be able to buy some shares in overseas companies (such as US stocks) directly in your ISA.

Or you can invest in funds that buy shares in overseas companies, for example, emerging markets funds.

What if I want to invest in only ethical companies?

Many platforms allow investors to choose ethical investments.

For example, Nutmeg has a ‘socially responsible option’ that helps you invest in companies that score highly for environmental, social and corporate governance (ESG) factors.

You can also choose ETFs that focus on themes such as sustainable energy or climate change-focused enterprises.

Can I transfer my cash ISA into a stocks and shares ISA?

You can transfer into a stocks and shares ISA, and choose how much you want to transfer, without it affecting your ISA allowance.

It’s important to use the official transfer process, though. If you take money out of a cash ISA yourself and then pay it into a stocks and shares ISA, it will count towards this year’s allowance.

What happens with dividends that I receive from a stocks and shares ISA?

Any dividends that are paid to you from shares in your ISA will be tax-free.

You can withdraw your dividends or reinvest them, provided you’re below the ISA allowance.

Can you lose all your money in a stocks and shares ISA?

Stock market returns are not guaranteed. This means you could face significant loss in the event of a market crash. You could, in theory, lose all your money.

But it’s important to note that so long as you don’t choose investments that are too high risk, you are highly unlikely to lose all your money. Investing isn’t gambling. For example, the COVID-19 pandemic wiped 35% off the FTSE All Share Index between 2 January and 23 March 2020, and gains have since been recovered.

There is also much you can do to control and reduce risk. For example, spreading your money across multiple geographies and sectors (known as diversification). Investing in different asset classes, such as cash and bonds, alongside equities, will also reduce risk.

You can also select funds that have a lower risk profile than others. Some funds will reduce risk for you by investing in several asset classes.

What are the alternatives to a stocks and shares ISA?

The two main alternatives to a stocks and shares ISA are a cash ISA and an innovative finance ISA. The pros and cons of a cash ISA are covered above.

An innovative finance ISA is similar to a stocks and shares ISA in terms of risk, but it invests instead in peer-to-peer (P2P) loans.

The other alternative is to invest in assets outside of the ISA wrapper. You can do this, but your gains would be subject to capital gains tax if they exceed the allowance.

You may also need to pay dividend income tax on any dividends you receive. From April 2026, tax on dividend income will increase 2% for basic and higher-rate taxpayers. The dividend tax rate for additional-rate taxpayers will remain unchanged.

Get expert financial advice

A stocks and shares ISA offers a tax-efficient route to long-term wealth growth, shielding investments from capital gains and dividend tax, and providing an opportunity to outpace inflation.

However, this comes with inherent market volatility and risk, making it generally unsuitable for short-term savings.

Given these nuances and the importance of aligning investments with personal financial goals and risk tolerance, consulting a qualified financial adviser is invaluable to determine if a Stocks and Shares ISA fits your individual circumstances.

If you found this article helpful, you might also find our articles about stamp duty on shares and how many ISAs you're allowed informative.