Stocks and shares ISA calculator — methodology

Step one: the pot

The projection runs in periods — a month, a quarter or a year, whichever you chose — in integer pence, so a thirty-year schedule has no floating-point balance drifting under it:

balance ← balance + contribution      (at the start of each period)
balance ← balance × (1 + periodic rate)
balance ← balance − charges

The annual rate becomes a periodic one as (1 + r)^(1/n) − 1, an effective conversion, so the rate you typed is the rate a year compounds to. Dividing by twelve instead — the nominal convention — turns 5% into about 5.12% a year and silently inflates an assumption you never made. Contribution timing and rate basis are both conventions rather than facts, they both move the answer, and the investment calculator prices each one on your own figures.

Step two: the dividend tax, one year at a time

Each year’s dividends are the yield applied to the balance the year opened at, and the tax on them is the tax engine run twice:

dividends(y) = opening balance(y) × yield
tax(y)       = income tax(your income + dividends(y)) − income tax(your income)

Running it per year is what makes the £500 dividend allowance an annual nil-rate band. A single blended rate over the term would either ignore the allowance or apply it once, and both are wrong by more than a rounding. It also means the dividends meet whatever rate your other income leaves them at, because dividends are the top slice of income — the same stacking the dividend tax calculator shows band by band.

Using the opening balance rather than an average of opening and closing understates the dividends of anyone still paying in. That is deliberate: it understates the figure this page exists to advertise, which is the direction an author should be careless in if they are going to be careless at all.

Step three: the capital gains tax, once, on sale

base cost      = money paid in + dividends already taxed
gain           = max(0, final value − base cost)
chargeable     = max(0, gain − annual exempt amount)
basic-rate room = max(0, basic-rate ceiling − your taxable income)
at 18.00%         = min(chargeable, basic-rate room)
at 24.00%         = chargeable − the part above

The dividends already taxed lift the base cost. A distribution that has borne income tax is money already brought into charge; taxing the same pounds again as a gain would double-count them and make this page’s own headline bigger than the truth. That is the line most likely to be got wrong in the flattering direction, so it is written into the table on the calculator itself rather than buried here.

The gain is stacked on taxable income — gross income less the personal allowance that actually applies to it, which above £100,000 is not the statutory figure — so a gain straddling the basic-rate ceiling meets both rates rather than one.

Rates and limits, read from the rules files this calculator runs on

Dividend and capital gains rates are UK-wide and are not devolved. Scottish rates apply to earned income only — but that earned income still decides which dividend band the dividends fall in and how much basic-rate room the gain finds.

Sources

• gov.uk — Individual Savings Accounts (ISAs)The subscription limit, and that no tax is due on income or gains inside an ISA.
• gov.uk — Tax on dividendsThe dividend allowance and the three dividend rates, which price the first half of the comparison.
• gov.uk — Capital gains tax ratesThe rates for shares and funds, and the fact that which one applies depends on the income the gain is stacked on.
• gov.uk — Capital gains tax rates and annual tax-free allowancesThe annual exempt amount.
• gov.uk — Income tax rates and allowances: current and pastThe personal allowance and its taper, and the basic-rate ceiling — a gain is taxed according to the income sitting underneath it.

Six assumptions the comparison rests on, none of them hidden

• Today’s rates, for the whole term. Every year is priced at 2026/27 figures. The dividend allowance and the capital gains annual exempt amount have both been cut repeatedly in the last decade, and nothing here projects that forward. This is the largest assumption on the page.
• The tax is settled from other money. That is how an accumulating fund works — nothing is distributed to pay the bill with — and it is why the pot is the same size in both worlds and the answer is a bill rather than a difference in outcome. A fund paying cash out, or units sold to settle the bill, leaves the ISA worth more than the figure shown.
• One disposal, in one tax year. One annual exempt amount comes off. Selling over several years uses it more than once and costs less, so the capital gains line is the worst case rather than the likely one.
• Your income holds steady, including in the year you sell. Selling in a year you earn less moves part of the gain into the lower rate for gains.
• A UK dividend. Offshore reporting funds, excess reportable income and equalisation payments have their own regime and none of it is modelled.
• The allowance is not enforced. The projection runs on whatever contribution you type. It says when a year of contributions exceeds £20,000; it does not cap them. The ISA allowance calculator is where the limits are worked out.