What is a stocks and shares ISA – and why should I open one?

As the end of the 2025 to 2026 tax year approaches, you may be looking for a tax-efficient way to invest – particularly through an individual savings account (ISA). 

ISAs were introduced by the UK government in 1999 to encourage people to save or invest. There are five types of ISAs. The two main ones are cash ISAs and stocks and shares ISAs, which have different risks and potential rewards.

At Vanguard, we offer a stocks and shares ISA, which allows you to invest in Vanguard funds, including exchange traded funds (ETFs), as well as cash. 

In this article, we explain how a stocks and shares ISA works and whether opening one before the end of the tax year on 5 April could be right for you.

1. What is a stocks and shares ISA?

A stocks and shares ISA is an investment account that lets you put money into a wide range of assets including shares, funds and bonds. The main benefit is that any growth or income you earn is tax free, making it a good way to grow your money over time. 

2. How much can you pay into an ISA?

£20,000 is the total you can invest in your ISAs in a tax year, which runs from 6 April to 5 April the following year. This limit applies to both cash and stocks and shares ISAs. So, if you invest £10,000 in cash ISAs, you can only invest up to £10,000 in stocks and shares ISAs in the same tax year. The allowance resets on 6 April and you can’t carry over any unused allowance to the following tax year.

3. What are the tax advantages of an ISA?

By investing through an ISA, you avoid paying income tax on dividends¹ or interest and capital gains tax (CGT) on profits or growth, so you keep more of your money.

This isn’t the case if your investments are held outside an ISA, such as in a general account. You could have to pay income tax if you receive dividends or interest, as well as CGT if you make a profit when you sell your investments.

And all that tax can add up. In the 2025 to 2026 tax year, the annual tax-free CGT allowance is £3,000. Profits above this amount are taxed at 18% if you’re a basic-rate taxpayer and 24% if you’re a higher-rate or additional-rate taxpayer. 

As for dividends above the annual tax-free allowance of £500, these are the current tax rates:

• 8.75% for basic-rate taxpayers

• 33.75% for higher-rate taxpayers

• 39.35% for additional-rate taxpayers

However, from 6 April 2026, the start of the new tax year, dividend tax rates will rise for basic-rate taxpayers and higher-rate taxpayers.

4. How much does it cost to invest in a stocks and shares ISA?

ISA providers charge fees. This could be a platform fee or they may take a share of the interest paid on cash balances. Some providers do both.

It’s best to know what a provider charges before you open an ISA as fees erode any returns you make. 

If you’re thinking about taking out a Vanguard Stocks and Shares ISA, find out what our fees and charges are.

5. Why should I start investing as early as possible?

Even if you can’t use the full £20,000 ISA annual allowance, it’s usually worth investing as much as you can afford. Small amounts can grow to a sizeable sum over time. This is because of the power of compounding – when you earn returns on the money you invest as well as on the returns themselves. Compounding is especially powerful over long periods, so the sooner you start, the greater your potential returns.

6. Can I open more than one ISA of the same type in a tax year?

You can open, and pay into, multiple ISAs in the same tax year. This includes cash and stocks and shares ISAs. Your total contributions must be within the £20,000 annual allowance. 

7. Can I transfer my ISA to another provider?

You can transfer your ISA to another provider. And you can transfer a cash ISA and a stocks and shares ISA to a Vanguard Stocks and Shares ISA. We do not offer cash ISAs.

To do this, you’ll need to give us your personal information and details about the ISA you want to transfer. Then we can start the transfer process.

Find out how to transfer an account to us

8. What is a flexible ISA and how does it work?

Vanguard’s ISA is flexible, which means you can withdraw cash and then put it back in during the same tax year without reducing that year’s allowance.

Keep in mind that stocks and shares ISAs are designed for long-term savings. If you withdraw any money, you’ll reduce the amount you have invested in the market. This could limit the potential for that money to grow over time, so it may not generate the expected returns.

9. Can I open a Junior ISA for my child?

Junior ISAs must be set up by an adult with parental responsibility for the child. A child can only have one cash Junior ISA and one stocks and shares Junior ISA at any time. The total annual allowance for Junior ISAs is £9,000.

When the child turns 18, their Vanguard Junior ISA automatically converts into a Vanguard Stocks and Shares ISA in their name.²

10. What happens to my ISA when I die?

When you die, your surviving spouse or civil partner can inherit your ISA without them losing the tax benefits.

They may be entitled to a one-off additional allowance (up to the value of your ISA), on top of their normal annual ISA allowance.

If they inherit your ISA through your will, your ISA will be transferred to their ISA. Otherwise, they’ll be able to invest the additional allowance using their own money.

If you leave your ISA to someone other than your spouse or civil partner, your ISA will become part of your estate, which may be subject to inheritance tax.

¹ Dividends are the payments some companies make to their shareholders out of their profits.

² We’ll first need to verify their identity and address.
 

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

The eligibility to invest in either ISA or Junior ISA depends on individual circumstances and all tax rules may change in future.

Any tax reliefs referred to are those available under current legislation, which may change, and their availability and value will depend on your individual circumstances. If you have questions relating to your specific tax situation, please contact your tax adviser.

Your transfer will be sent to us as cash or shares (Vanguard funds only). During the transfer period any cash will not be invested so you could miss out on any increase in the value of your investments should the market rise.

Important information

Vanguard only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described, please contact your financial adviser.

This is designed for use by, and is directed only at, persons resident in the UK.

The information contained herein is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information does not constitute legal, tax, or investment advice. You must not, therefore, rely on it when making any investment decisions.

Vanguard will manage your investments in the Managed ISA on your behalf. You will not be able to place trades on your own account.

Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.

© 2026 Vanguard Asset Management Limited. All rights reserved.

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