Short answer: No. You do not pay income tax, dividend tax or capital gains tax on money held inside a stocks and shares ISA.
Any growth, dividends or interest your investments generate is completely free of UK tax, for as long as the money stays in the ISA wrapper — and you don't even have to declare it on a tax return. There is one small tax you still pay when buying certain shares, which we'll explain below, but for the vast majority of investors an ISA is genuinely tax-free.
This guide explains exactly how tax works on a stocks and shares ISA in the 2025/26 tax year, the one charge that still applies, what happens when you withdraw, and how much tax you could actually save compared with investing outside an ISA.
What a stocks and shares ISA actually protects you from
A stocks and shares ISA is a "tax wrapper". You put money in (up to your annual allowance), buy investments such as shares, funds or ETFs inside it, and HMRC agrees not to tax what happens in there. If you're new to the concept, our full explainer on what a stocks and shares ISA is walks through the basics.
Outside an ISA, three separate taxes can eat into your investment returns:
- Income tax on interest.
- Dividend tax on dividends paid by shares and funds.
- Capital gains tax (CGT) on the profit when you sell for more than you paid.
Inside a stocks and shares ISA, all three of these are removed. Let's look at each one.
Do you pay income tax or dividend tax in a stocks and shares ISA?
No. Any dividends paid by the shares, funds or investment trusts you hold inside your ISA are completely tax-free, no matter how large they get.
This matters more than most people realise, because the tax-free dividend allowance outside an ISA has been slashed to just £500 for 2025/26 (it was £5,000 back in 2017/18). Once you go over that £500, dividends are taxed at:
- 8.75% if you're a basic-rate taxpayer
- 33.75% if you're a higher-rate taxpayer
- 39.35% if you're an additional-rate taxpayer
These rates are also set to rise from April 2026, with the basic rate climbing to 10.75% and the higher rate to 35.75%. Inside a stocks and shares ISA, none of this applies — you keep 100% of every dividend. For anyone building a dividend income portfolio, sheltering those payments inside an ISA is one of the simplest tax wins available.
Do you pay capital gains tax on a stocks and shares ISA?
No. When you sell investments inside your ISA for a profit, that gain is entirely free of capital gains tax — regardless of how much you make.
Again, this is a big deal because the capital gains tax allowance on shares has been cut hard. For 2025/26 the annual exempt amount is just £3,000, down from £12,300 only a few years ago. Go over it and you'll pay CGT on the excess at:
- 18% as a basic-rate taxpayer
- 24% as a higher or additional-rate taxpayer
Those rates jumped in the Autumn Budget 2024 (from 10% and 20%), which makes an ISA even more valuable. Inside the wrapper you can sell, switch funds and rebalance as often as you like without ever triggering a CGT bill or having to track your gains.
The one tax you DO still pay inside an ISA
Here's the honest bit most "tax-free" headlines skip over. A stocks and shares ISA shelters you from income, dividend and capital gains tax — but not from stamp duty.
When you buy UK shares, you pay Stamp Duty Reserve Tax (SDRT) of 0.5% of the purchase value. This applies whether the shares sit in a general investment account, a stocks and shares ISA or a SIPP — the ISA wrapper makes no difference. So if you buy £2,000 of a UK company's shares, you'll pay roughly £10 in stamp duty even inside your ISA.
Two things worth knowing:
- Funds and ETFs are usually exempt. Many investors favour Irish-domiciled ETFs, which are not subject to UK stamp duty.
- Overseas dividends can face withholding tax. US shares, for example, still have around 15% withheld at source on dividends (once you complete a W-8BEN form with your broker). An ISA can't override a foreign country's tax rules — but it does protect you from all UK tax on those holdings.
Do you pay tax when you take money out of an ISA?
No. Withdrawals from a stocks and shares ISA are completely tax-free, whenever you make them and however much your investments have grown. There is no tax on the way in (you invest with money you've already paid income tax on) and no tax on the way out.
This is a key difference from a pension. With a SIPP compared with an ISA, you get tax relief going in but pay income tax on most of the money when you draw it in retirement. With an ISA it's the reverse — no relief up front, but every penny comes out tax-free.
Do you have to declare a stocks and shares ISA on your tax return?
No. You do not need to report any ISA interest, dividends or capital gains to HMRC, and you don't declare them on a Self Assessment tax return. Because everything inside the wrapper is tax-free, there is simply nothing to report. This alone saves a lot of investors the hassle of tracking gains and losses across a general investment account every year.
ISA vs a general investment account: the tax difference
The clearest way to see the value of an ISA is to compare it with investing the same money in a taxable (general investment) account:
| Tax | Inside a Stocks & Shares ISA | Outside (general account) |
|---|---|---|
| Dividend tax | £0 — tax-free | 8.75%–39.35% above £500 |
| Capital gains tax | £0 — tax-free | 18%–24% above £3,000 |
| Income tax on interest | £0 — tax-free | Taxed at your income tax rate |
| Stamp duty on UK shares | 0.5% (still applies) | 0.5% |
| On tax return? | No | Yes, if over allowances |
For a fuller picture of how the two wrappers stack up — and whether the tax savings are worth it for your situation — see our guides on whether a stocks and shares ISA is worth it and cash ISA vs stocks and shares ISA.
What about inheritance tax?
This is the one area where ISAs are not tax-free. When you die, the value of your stocks and shares ISA counts as part of your estate and may be subject to inheritance tax (IHT) at 40% above the available nil-rate bands, like any other asset.
There is one important relief for couples: if your spouse or civil partner dies, you can inherit an "additional permitted subscription" (APS) equal to the value of their ISA, letting you keep that money within a tax-free wrapper. But for IHT purposes generally, an ISA offers no special protection — something to factor into longer-term estate planning.
How the £20,000 allowance limits your tax-free investing
The reason an ISA is so valuable is also the reason it's limited: you can only shelter so much each year. For 2025/26 the ISA allowance is £20,000, which is the combined total you can pay across all your ISAs (cash, stocks and shares, Lifetime and Innovative Finance) in a single tax year.
A few rules worth remembering:
- The allowance resets every 6 April and any unused portion is lost — it can't be carried over.
- It has been frozen at £20,000 since 2017/18.
- Transferring an existing ISA between providers does not use up your allowance, so you can transfer a stocks and shares ISA freely without losing tax benefits.
- From April 2027, the cash ISA limit for under-65s may be cut to £12,000, while the full £20,000 is expected to remain available for stocks and shares ISAs.
For the full set of contribution and eligibility rules, see our detailed stocks and shares ISA rules guide.
How much tax could a stocks and shares ISA actually save you?
Consider a higher-rate taxpayer who invests £20,000 a year and, over time, builds a £150,000 portfolio yielding 4% in dividends. That's £6,000 of dividends a year. Outside an ISA, after the £500 allowance, they'd owe 33.75% on £5,500 — roughly £1,856 in dividend tax every year, and more still if they sold holdings and triggered capital gains. Inside an ISA, that tax bill is zero.
Over a decade or two, sheltering both the dividends and the eventual capital growth can save tens of thousands of pounds — money that stays invested and compounds. You can model your own numbers with our stocks and shares ISA calculator to see how much your ISA could be worth.
Frequently asked questions
Do you pay tax on stocks and shares ISA withdrawals?
No. All withdrawals are tax-free, at any time and any amount. You don't pay income tax or capital gains tax when you take money out.
Do you pay tax on dividends in a stocks and shares ISA?
No UK dividend tax applies. Dividends from UK shares and funds are completely tax-free inside the ISA. Dividends from overseas shares (such as US stocks) may still have foreign withholding tax deducted at source.
Do I need to tell HMRC about my ISA?
No. There is nothing to declare on a tax return — your ISA provider handles the tax treatment automatically.
Is a stocks and shares ISA 100% tax-free?
Almost. It's free of income, dividend and capital gains tax, but you still pay 0.5% stamp duty when buying UK shares, and ISAs can be subject to inheritance tax on death.
The bottom line
So, do you pay tax on a stocks and shares ISA? For nearly everything that matters — dividends, capital gains, interest and withdrawals — the answer is a clear no. The only exceptions are the 0.5% stamp duty on UK share purchases, possible withholding tax on foreign dividends, and inheritance tax when you die. With the dividend and capital gains allowances now cut to just £500 and £3,000, the tax savings from an ISA are bigger than they've been in years.
If you're ready to take advantage of your £20,000 allowance, our guides on how to open a stocks and shares ISA and the best stocks and shares ISA providers will help you get started.
This article is for general information only and does not constitute financial or tax advice. Tax rules depend on your individual circumstances and may change. Consider speaking to a qualified adviser before making investment decisions.
