What is an ISA?
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
History of the ISA
Originally introduced by Chancellor Nigel Lawson in 1986 as the Personal Equity Plan (PEP)1, its purpose was to encourage the “democratisation” of investment, by offering a tax-efficient avenue into the stock market to a broader range of savers. The original amount that savers could shelter from the tax authorities was set at £2,400 per annum.2 The PEP was replaced in 1999 by the ISA,2 but its intention remained the same. At the outset, savers could place £7,000 each year into an ISA. The amount each adult can currently shelter in an ISA each year stands at £20,000 per person.3
How much has been invested in ISAs in the UK
The amount we’re paying into ISAs has grown significantly over the years. In the tax year of their introduction £28.4 billion was saved across 9.3 million adult ISAs.4 By the 2023-24 tax year, this amount had grown to £103 billion across 15 million adult ISAs.5 It has clearly been a huge success, attracting more than £872 billion of investment since 1999.5 More than 22 million UK adults currently use the ISA wrapper to help build their long-term wealth,7 which is clear evidence that the tax-efficient structure has gone some way to fulfil its original objectives.
Are there many ISA millionaires?
The stocks and shares ISA has clearly been successful in encouraging more investors to access the UK stock market to help build their long-term wealth. So much so, in fact, that it is estimated that the UK now has almost 5,000 ISA millionaires.6 Within the investment trust industry, according to research from the Association of Investment Companies (AIC), the trade association which represents the investment trust sector, a total of 50 investment trusts could have created millionaires of their shareholders.7
What are the different types of ISA?
Cash ISAs
Cash ISAs provide a tax efficient wrapper for cash savings. They operate like any other type of savings account, but the rates may be more attractive. The allowance for cash ISAs is currently £20,000, but drops to £12,000 from April 2027 for people under the age of 65.8
Stocks and Shares ISAs
Stocks and shares ISAs can hold a wide range of investment options, including collective funds such as investment trusts and unit trusts, single stocks, corporate or government bonds. The allowance is £20,000.
Junior ISA
All children resident in the UK are eligible for a Junior ISA. Anyone – parents, grandparents, friends – can contribute up to the annual limit, which is £9,000.9 It automatically converts to a normal Isa at age 18.
Lifetime ISA
Introduced in April 2017, the ‘Lifetime ISA’ can be opened by anyone under 40.10 Investors can put in up to £4,000 each year, up to the age of 50. The government tops up the contributions by 25% up to a maximum of £1,000. The ISA needs to be used to buy a first home or for retirement.
ISA tax benefits
- All interest, dividends and capital growth earned on investments held within an ISA are free from income and capital gains tax.
- You can also withdraw money from ISAs without paying tax on it. This is particularly useful when drawing an income from your investments.
- You do not need to declare your ISA holdings and any ISA interest, income or capital gains from them on your tax return.
- There are also inheritance tax advantages when passing ISAs between spouses.
Advantages of an ISA
-
Stocks & Shares ISAs are a flexible savings option. You can withdraw money at any time, and many ISAs will allow you to reinvest in the same tax year without losing your allowances.
-
Stocks & Shares ISAs allow investors to hold a wide variety of investment options. As a result, it is possible to build a diversified portfolio to suit a range of outcomes, including investing for capital growth, or income, or for a combination of the two.
-
Stocks & Shares ISAs are widely available on investment platforms and usually come at little or no cost for investors. They are easy to use and can save on administration.
How to invest in a stocks and shares ISA
There are a number of key decisions you need to make when building your ISA portfolio:
How involved you’d like to be with your investments - do you want a ‘ready made’ portfolio or to pick the investments yourself?
How much risk you’d like to take – do you want lower risk options, such as an equity income fund? Or a higher growth option, such as smaller companies, which may be more volatile.
How long you plan to stay invested – the longer your time horizon, the more you are in a position to ride out short-term volatility in the stock market.
Do you want to invest for income, capital growth or a combination of both?
What can you use an ISA for?
With the exception of the Lifetime ISA, ISAs can be used for any purpose. They are a natural choice for those who want to build a tax-free income stream, perhaps to pay for educational costs for children, or to supplement retirement income. Equally, they can be used for long-term capital growth. Because they are not taxed, it allows investors to make use of compounding, with savings growing faster.
Stocks and Shares ISA vs Cash ISA
- Investors have a choice between a stocks and shares ISA and a cash ISA. For long-term investors that can ride out short-term volatility, stocks and shares will usually give a higher return than cash savings and greater protection against inflation. But stock markets can be choppy, and – unlike a cash ISA - your investments can go down as well as up in value. That means, potentially, getting back less than you put in.
- There are generally two sources of growth for a stocks and shares ISA. The first is growth in the share prices. If an investor – or their fund manager – picks good companies, which can grow their profits over time, it is likely to result in share price growth, lifting the value of the investment.
- The second source of growth is dividends. Many companies pay out a share of their profits in the form of dividends. You can either take the income, or reinvest the dividends to buy more shares in the company. This can be a powerful source of compound returns. Over the past 20 years, the return from an investment in the FTSE 100 would have been more than double had dividends been reinvested.3
The importance of diversification
Diversification is a vital tool when building an ISA portfolio. Creating a diversified portfolio is straightforward in theory. It means spreading your investments across a range of investment types, such as bonds, equities and cash, or, within your stock market investments, spreading them across different countries and sectors. It will also mean ensuring that your portfolio isn’t too exposed to specific risks, such as interest rates or the oil price. There are a number of advantages:
-
No matter how much research and due diligence you have done before you invest, there will always be shocks. There will be new and disruptive technology, there will be pandemics, geopolitical conflict and economic upheaval. These can disrupt the best laid plans of any investor. By holding a balanced portfolio, with a range of different investments, you are prepared for a range of outcomes.
-
By diversifying your portfolio, you can maximise your opportunity set. It means not looking in one specific area to generate returns, but spreading the net as wide as possible. It forces investors to look at new areas of innovation, and find opportunities for growth.
-
When investing, it is always tempting to follow the herd, and gravitate to the areas that other investors are excited about. However, this can see investors become vulnerable to bubbles and crowded trades. Diversifying across investments helps manage this inclination.
Understanding portfolio diversification
Diversification isn’t always easy to achieve in practice. For example, it is not enough simply to blend companies that are listed in different markets, because those companies might draw their revenues from across the world. It is often assumed, for example, that UK smaller companies are solely exposed to the UK domestic economy. However, the companies held in the BlackRock Smaller Companies Trust will often have revenues from across the world.
-
The correlation between asset classes can be quite different at different points in the cycle. For example, in some conditions, bonds will provide a strong diversification to stock markets. Bond markets usually do well at times of deflation, while stock markets do better when there is plenty of economic growth around.2 However, there are times when this relationship breaks down.
-
There are reasons why diversification is particularly important today. After a strong run for the US mega-cap technology sector, the US market now looks more concentrated than it has done for several decades. As at the end of November 2025, the S&P 500 had over 36% of its market capitalisation in its top 10 stocks.5
-
One of the most important advantages of a diversified portfolio is that it can help keep you invested. Investors can be unsettled by market volatility, which prompts them to sell at the first sign of volatility. Studies show that investor behaviour tends to be a barrier to higher returns, with investors buying in and selling out at exactly the wrong moments.7 A steadier portfolio can help you avoid the perils of market timing and keep you invested over time.
Why are investment trusts ideal for ISA savers?
The ISA’s role in democratising investment in the UK has helped catalyse the significant growth we have seen from the investment trust industry. BlackRock has been managing investment trusts for more than 30 years and now manages nine investment trusts focused on specific market niches.
Liquidity and ease of access - Investment trusts are listed on the stock market, which provides a simple and liquid route for buying and selling their shares, via online trading platforms or through an independent financial adviser. A listing also provides visibility and credibility for ISA investors.
Gearing can enhance returns - Investment trusts can also borrow to increase the amount of assets that are available for investment. This amplifies the potential return available by providing additional capital to invest in the underlying assets. This allows investors to benefit from increased exposure to rising markets over the long term, but exposes them more to potential price declines in the short term.
Income advantages - Investment trusts have the ability to reserve income from their underlying holdings when times are good and pay them out when times are tougher. Investment trusts can also pay income from capital growth. This is designed to smooth the return to investors and provide a more consistent dividend stream. Within an ISA, this dividend can be reinvested or paid out tax-free.
Opportunity to buy at a discount - As ‘closed-ended funds’, investment trusts have a finite number of shares in issue. Supply and demand are balanced by the stock market through movements in the share price. This can often move away from a trust’s net asset value (NAV), which means investors can sometimes find investment trusts at a discount, when the share price is trading below NAV.
Our range
Source:
1Hansard – 1986 Budget Statement – 18 March 1986
2Hansard – 1998 Spring Budget Statement – 17 March 1998
3Gov.uk – Individual Savings Accounts - 11 March 2025
4Gov.uk - ISA statistics release - June 2020
5Gov.uk - ISA savings statistics 2025 - September 2025
6Investment Week – Number of ISA millionaires hits all-time high of nearly 5,000 - 13 November 2024
7The AIC - The 50 investment trusts that would have made you an ISA millionaire - 24 February 2025
8BBC - When will the cash Isa saving limits change? - 27 November 2025
9Gov.uk - Junior ISAs - November 2025
10Gov.uk - Lifetime ISA - November 2025
Risk Warnings
Investors should refer to the prospectus or offering documentation for the funds full list of risks.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time and depend on personal individual circumstances.
Fund-specific risks
BlackRock Smaller Companies Trust plc
Counterparty Risk, Gearing Risk, Liquidity Risk, Smaller Companies
Description of Fund Risks
Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Gearing Risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
Liquidity Risk: The Fund's investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Fund may not be able to realise the investment at the latest market price or at a price considered fair.
Smaller Companies: Shares in smaller companies typically trade in less volume and experience greater price variations than larger companies.
