STOCKS AND SHARES
ISAS EXPLAINED

Looking to invest in a tax-efficient way? Stocks and Shares ISAs can help you optimise the returns on your long-term investment plan. Here’s what you need to know about this popular investment approach.

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Stocks and Shares ISAs give investors an opportunity to buy stocks and shares and avoid paying tax on any investment returns. They are designed to be user-friendly, for example, many let you withdraw your money whenever you want. This is what you need to know about how Stocks and Shares ISAs work.

What is a Stocks and Shares ISA?

A Stocks and Shares ISA, also known as an investment ISA, is a tax-efficient investment account that allows investors to create an investment portfolio which doesn’t pay Capital Gains Tax (CGT) or Income Tax on any investment returns. 

First introduced by HMRC in 1999, they are only available to residents of the UK.

How do Stocks and Shares ISAs work?

If you are buying stocks to hold in an Investment ISA the mechanics of the investment process are the same as if you were trading outside of an ISA. You still have to carry out research and analysis to ensure you pick stocks which you think will go up in value, and decide on the best times to buy and sell. The tax protection applies to both capital gains and dividend income.

A Stocks and Shares ISA can hold a range of assets, including:

• UK and overseas shares 
• Exchange Traded Funds (ETFs)
• Unit trusts and investment funds
• Government and corporate bonds

The ability to include different types of financial instruments in a Stocks and Shares ISA allows you to build a portfolio which incorporates the benefits of diversification. You can also rebalance your portfolio by adjusting the weightings to different asset groups should market conditions or your personal circumstances change. And if you want to, you can liquidate some of your investments and withdraw cash. None of these actions will impact the tax-efficiency of your ISA. 

How much can you invest into a Stocks and Shares ISA? 

The maximum lump sum you can pay into your Stocks and Shares ISA in the 2025/2026 tax year is £20,000. You don’t have to deposit the total amount in one lump sum and can instead top up your ISA through the tax year until you reach the £20,000 limit. There are additional allowances for those transferring an existing ISA from one provider to another.

Stocks and Shares ISAs vs Cash ISAs

An alternative form of ISA is a Cash ISA which is more like a bank account. Instead of buying stocks or other financial instruments which you hope will go up in value, with a Cash ISA you receive interest income on your capital, but this is still protected from taxes.

Given that the tax treatment of Cash ISAs and Stocks and Shares ISAs is the same, the decision on which route you follow will depend on your appetite for risk and investment aims. It’s worth breaking down the pros and cons of Cash ISAs vs Stocks and Shares ISAs and establishing what type of saver/investor you are.

Questions to ask yourself	Cash ISA	Stocks and Shares ISA
Do you want to minimise the risk of losing some of your money?	👍	👎
Are you prepared to accept greater risk in pursuit of higher returns?	👎	👍
Will you hold your ISA for five years or more?	👎	👍
Are you looking to minimise administration and account management fees?	👍	👎

Can you have a Cash ISA and a Stocks and Shares ISA?

The ISA scheme is being constantly updated. For some time you have been able to pay into two different types of ISAs in the same tax year. So you could pay into both a cash ISA and a Stocks and Shares ISA in one tax year as long as your total investment remains below the £20,000 limit. 

Since the start of the 2024-25 tax year you have also been able to invest in two Stocks and Shares ISAs in the same tax year. And you can still transfer an existing Stocks and Shares ISA that was set up in a previous tax year if you want to move it to a new broker platform. 

How do you open a Stocks and Shares ISA?

If you want to buy stocks and hold them in a Stocks and Shares ISA you need to first of all set up your ISA with a broker. This can be done online and involves providing personal information to link the account to your tax profile. Once the account is set up, you can start buying the stocks you want to hold in it.

It is also important to keep track of the UK tax year which runs from 6th April to 5th April. If you invested £20,000 in an Investment ISA on 30th March, then you would be able to invest a further £20,000 on, or after, 5th April – as the new tax year would have started. 

The tax-year allowance brings into play an important point about Stocks and Shares ISAs. Whilst they make your investment returns tax-free, you still need to buy into the market at the right time. If you make a loss on your investment any potential tax efficiencies become irrelevant.

How to open a Stocks and Shares ISA with eToro?

You can set up a Stocks and Shares ISA on the eToro platform as well as keeping your regular trading account active. To open a Stocks and Shares ISA:

• Log into your account on the eToro platform.
• Click on ISA in the main menu.
• Follow the onscreen instructions and you’ll be taken to the MoneyFarm platform.

• Choose whether you want to set up a ‘DIY’ or ‘Managed’ Stocks and Shares ISA. There are pros and cons of DIY and Managed ISAs, so establish which approach is the best for you.
• This is also where you can start the process of transferring an existing ISA which you currently hold with another service provider while maintaining the tax advantages. 
• Follow the onscreen instructions from here.

Investors can open a Stocks and Shares ISA with eToro due to our partnership with MoneyFarm.

Final thoughts

The benefits of investing using ISAs are possibly best demonstrated by the fact that more than 20m people in the UK currently hold one.

The ability to withdraw funds at any time is a big plus point for many who want to invest for a long-term goal, but also have the option to adjust their approach when they feel the need to. But if things go to plan, any capital or income returns in your Stocks and Shares ISA are protected from tax, which can represent a significant saving when investing over the long-term.

Visit the eToro Academy to learn how to get the most out of investment strategies.

FAQs

Should I only ever invest or trade using a Stocks and Shares ISA?

Despite the obvious tax advantages of investing using a Stocks and Shares ISA there could be instances where you want to use a standard CFD trading account at the same time, or instead of using an ISA. You might want to use CFDs to open a short position as a hedge, or to trade more speculatively or target short term opportunities. As CFDs aren’t eligible for inclusion in an ISA, you would have to use a standard CFD trading account to apply those strategies. 

What is dollar-cost-averaging?

Dollar-cost-averaging is an investment technique which involves investing smaller amounts of money over time rather than buying into a market using one lump-sum. It factors in that market conditions change over time, so sometimes you will be buying when prices are higher than their long-term average, and sometimes they will be lower than the average. But overall, your net entry price should be more inline with the long-term market average than if you started investing with just one trade.

How do I know if my Stocks and Shares ISA is ‘Flexible’?

You can tell if your Stocks and Shares ISA is flexible by checking the terms and conditions of your account or contacting your ISA provider. If you have to withdraw cash from your ISA to manage short-term liquidity issues then having the ability to reinvest it is a positive feature. So it is worth establishing the T&Cs on your account when starting out.

What can’t you do in a Stocks and Shares ISA?

There are a range of trading activities you can’t perform in an ISA. You can’t short sell, you can only go long positions. You can’t buy warrants and other derivative instruments, and you can’t offset losses in an ISA against positive returns elsewhere. Another restriction is the annual limit on deposits which is currently £20,000.

Can I transfer funds in a Cash ISA into a Stocks and Shares ISA?

Yes. You can transfer some or part of the money held in a Cash ISA into a Stocks and Shares ISA. The Cash ISA could have been set up in the same or a previous tax year and you won’t lose any tax benefits on the money you transfer. Transferring money from a Cash ISA set up in a previous year won’t count towards your annual £20,000 ISA allowance.