What is a stocks & shares ISA?

The value of your investments and the income you receive from them can go up and down, and you may get back less than you invest. Any examples are for illustration purposes only. ISA eligibility and tax rules apply.

Whether you’ve heard of a stocks and shares ISA, a stocks ISA or an investment ISA, they’re all describing the same thing - an individual savings account (ISA) that lets you invest in listed stocks and other assets without paying UK taxes. This tax efficiency means you’ll also see stocks and shares ISAs labelled ‘tax wrappers’ as you won’t pay UK dividend tax on any shareholder payouts you receive, or capital gains tax (CGT) on any investment profits you make from investments inside them.

To open your stocks & shares ISA account, you need to be 18 or over and a UK resident for tax purposes. Crown employees and members of the armed forces living abroad are also eligible.

As you’ll be investing, it’s also a good idea to think about a time horizon of at least five years, to allow for the compounding effect to start and to help smooth short-term kinks in the charts caused by natural volatility. Your money isn’t ‘locked up’ though. On that note, you do need to keep in mind that the value of investments goes down as well as up and you might end up with less that you invested at the start.

£20,000 is the current annual ISA allowance. You don’t have to put the full amount in though, just whatever amount suits you up to a maximum of £20,000. You can also spread that allowance across other types of ISA like cash ISAs, as long as the total amount you contribute in one tax year doesn’t exceed £20,000. When it comes to any investment growth you may achieve, there is no ceiling to the amount you are allowed to amass and still be eligible for ISA benefits - that tax efficiency will still be there. Your allowance regularly resets at the start of the tax year and you can’t carry forward any unused allowance.

The UK tax year runs from 6 April - 5 April, so the next ISA deadline is 5 April 2026. This means you can contribute as much of that £20,000 allowance as you like until then. After that date, the allowance will reset and you will have a new one for the new tax year.

As we’ve said, your stocks and shares ISA is the tax-efficient outer shell that you can fill with investments. In terms of the assets you can actually put in there, on Robinhood there is a range of over 5,000 US stocks. Some other common asset types are:

• International stocks
• Bonds
• Exchange-traded funds (ETFs)
• Investment trusts (aka investment companies)
• Mutual funds (open-ended investment companies, OEICs; units trusts)
• Special purpose acquisition vehicles (SPACs)

It’s not an exhaustive list but it covers the lion’s share of what most investors want to hold in their stocks and shares ISAs. The important part is that you have a wide choice of assets, which might come in handy for diversification purposes.

There will be times when you haven’t made an investment yet, or have just sold and have money in the waiting room before your next buy. So, yes it’s possible to hold cash in your stocks and shares ISA but it’s maybe not the best place to hold cash for the long term. That’s because the purpose of a stocks and shares ISA is to put your money to work in the stock market and other investible assets rather than holding it as cash. That’s what a cash ISA is for.

There’s nothing wrong with holding cash as a diversifier, although holding too much might scupper your long-term returns. It’s just that a stocks and shares ISA might be better suited to holding just that: stocks and shares.

If you invest outside of a stocks and shares ISA or any other tax-efficient account, you might find that you end up having to pay tax on any returns you make, above a certain threshold. If you make a profit when you sell an investment (a capital gain) you might be liable for capital gains tax. The same goes for any shareholder income (dividends) you receive and interest you earn from cash savings or from investing in bonds.

While each of these carries its own allowance each tax year, and will affect investors differently depending on how much tax they pay from their earned income, none of these situations attract UK tax in a stocks and shares ISA.

UK investors do still have certain levies to keep in mind though. First is stamp duty. The standard rate is 0.5%, which is automatically taken when you buy a UK stock (apart from AIM-listed stocks and certain ETFs). Stamp duty isn’t charged on US stocks.

Second is US withholding tax. When a UK investor earns income from a US source e.g. a dividend from a US-listed stock, the US withholds a portion of the payout before it leaves the country. Normally the US keeps back 30% but, thanks to a UK-US tax treaty, that drops to 15% for UK investors on the condition that they fill in a W-8BEN form. Robinhood will give you the chance to complete one.

Both of these payments happen automatically, which helps reduce the admin burden - another aspect of stocks and shares ISAs. For some, the knowledge that there’s no paperwork to fill in will be as useful as the tax benefits themselves.

Investing naturally carries risk - it’s part of the deal and is the price we pay for the hopeful long-term outperformance of shares over cash. That doesn’t mean the ISA tax wrapper inherently carries risk though. You get to determine your own risk level by deciding what goes inside the stocks and shares ISA. It’s why getting started investing the right way is so important - and it’s also why we’re on hand to help.

If you are looking for a tax-efficient way to invest up to £20,000 in the current tax year and cut down on some of the paperwork that comes with dealing with UK taxes, a stocks and shares ISA might be worth looking into. ISAs aren’t just for wealthy investors and there are no ‘lock-up’ periods when you invest in a stocks and shares ISA. Investing through them does mean acknowledging the risk of taking part in the stock market - a clear difference than dealing with cash ISAs - so be sure to school up on managing volatility if it is a route you want to explore.

Important information

When investing, your capital is at risk. The value of your investments, and the income you receive from them, can go down as well as up and you may get back less than you invest. Forecasts aren’t a reliable guide to future results or returns.

Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information and does not constitute any financial advice. This is not an offer, recommendation, inducement or invitation to buy, sell, or hold any securities, or to engage in any investment activity or strategy.

Robinhood doesn’t provide tax advice. You should seek advice if you have any questions regarding the impact your investments will have on your income tax and tax filing requirements.