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Get to grips with tax on investments so your money goes further.
The information on this page should not be considered as financial advice. If you are unsure what’s right for you, please make sure you speak to a financial adviser.
If you’re thinking of investing or already have experience, it’s important to understand how tax on investments works and what this means for you.
Depending on what you earn, you might have to pay tax on investment income, which can impact your overall returns.
If you’re confused by the rules around tax on investments, speak to a financial adviser. They’ll explain all you need to know about paying tax on investments, with recommendations on tax-free ways to save and invest.
Do you pay tax on investments?
When you invest, it’s good to know how tax might affect your returns. In most cases, any profit you make from investments will be subject to tax.
The situation is different for an individual savings account (ISA) or self-invested personal pension (SIPP), both of which can be used to shield your investments from tax. Similarly, onshore bonds are not subject to Capital Gains Tax and can act as an effective tax-planning wrapper.
But for other investments, your tax liability depends on several factors, such as your personal tax status and any profits you earn. Getting guidance on UK tax matters, particularly regarding investments, pensions and inheritance, can help you make informed decisions.
Understanding tax on investments
Most investment income will be taxed at your standard rate of income tax and will count towards your personal allowance.
This is not the same as your tax-free allowance for any shares that you may own.
For the 2025/26 tax year, you can earn up to £500 in dividends from company profit-share schemes without paying tax on it. You’ll pay dividend tax on anything above this amount based on one of the following income tax bands:
| Basic rate | Higher rate | Additional rate |
| 8.75% | 33.75% | 39.35% |
What taxes apply to my investments?
You’ll be taxed on investments in the following ways:
1. Income tax
Investments are designed to provide you with income through either interest payments or dividends.
If you get income from investment payments, such as investing in bonds, you may have to pay income tax depending on your income tax band and allowance. Here’s what it means for you and your investments:
- Any income you earn, whether from interest, wages or a pension, is tax-free up to your personal allowance of £12,570.
- If you pay tax at the basic rate, you can earn saving income like interest of up to £1,000 tax-free each year, known as your personal savings allowance.
- The allowance for higher-rate taxpayers is £500.
- Additional-rate taxpayers get no personal savings allowance.
As an investor, you’ll pay tax on any savings income like interest you earn above these allowances, as well as your ‘starting rate’ for savings, which only applies if your other income, such as wages or pension, is less than £17,570 per year. If you meet the criteria, you could earn up to £5,000 in tax-free interest.
Any saving income like interest you earn above these allowances will be taxed by HMRC at your current income tax rate (2025/26 tax year):
| Income tax band | Income threshold | Tax rate |
| Personal allowance | Up to £12,570* Up to £13,830 if claiming marriage allowance Up to £15,700 if claiming blind person’s allowance |
0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | £125,140 and above | 45% |
* Your personal allowance goes down by £1 for every £2 your income is over £100,000.
2. Share dividend tax
If you earn income from share dividends, you may be liable for dividend tax. Dividends are periodic payments made to shareholders from a company’s profits.
Dividends that fall within your personal allowance are tax-free. You also benefit from a separate annual dividend allowance of £500 each year. Any dividends above this allowance are subject to tax in line with your income tax band. This means:
| Income tax band | Dividend tax rate above the allowance |
| Basic rate | 8.75% |
| Higher rate | 33.75% |
| Additional rate | 39.35% |
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3. Capital gains tax
Capital gains tax (CGT) is charged on any profit or gains you make when selling investments that have risen in value.
This only applies when your gains exceed your capital gains tax allowance of £3,000 for the 2025/26 tax year.
For instance, if you purchase shares for £5,000 then sell them for £8,000, your capital gain would be £3,000, and you may owe tax on that profit.
However, you generally don’t pay CGT on gifts to your spouse, civil partner, or charity. Some assets are also exempt from CGT altogether, such as:
- PEPs and ISAs.
- Onshore bonds.
- Premium Bonds or UK government gilts.
- Lottery or pool winnings, betting profits.
4. Stocks and shares capital gains tax
The amount of capital gains tax due on stocks and shares depends on your income tax band.
To work out how much CGT you’ll pay, simply add your gains to your income. If this combined amount falls within the basic rate tax band, you’ll pay 18%. If it pushes you into the higher tax band, you’ll pay 24%.
5. Stamp duty on shares
Stamp duty may be applied when you buy shares. The way it’s calculated varies according to how you purchased your shares.
If you’re using a stock transfer form (paper transfer form) and the value exceeds £1,000, you’ll pay stamp duty at 0.5% of the transaction, rounded up to the nearest £5. You must also send a signed and dated copy of the transfer form to the Stamp Office within 30 days.
If you buy shares via the electronic CREST system, Stamp Duty Reserve Tax (SDRT) applies at 0.5% and is automatically deducted at the point of purchase. Not only that, but SDRT also applies to ‘off-market’ share transactions that occur outside of CREST.
How to pay tax on investments and savings
Tax on investments and savings is linked to how you normally pay tax.
If you’re in employment or receive a pension, HMRC will update your tax code so the correct amount is deducted automatically, including tax on interest you earn from savings.
However, you must notify HMRC if you earn between £500 and £10,000 in dividend income and this pushes you over your personal allowance. If you earn above £10,000 from savings and investments, you must complete a self-assessment tax return.
Additionally, should you go over your CGT allowance, you must inform HMRC and also include the details in your tax return.
What is tax on offshore investments?
UK-based investment funds are subject to specific HMRC tax rules, but the rules are different for offshore funds.
Any profit you make from offshore investments is taxed as income rather than capital gains. That’s because it can be difficult to determine whether gains are from income or capital.
This distinction is highly important, as income tax rates can reach up to 45% compared to a maximum of 24% for capital gains.
Any offshore fund must also provide each of their UK investors with a report so they can determine their share of reportable income for their tax returns.
What investments are the most tax-efficient?
There are several ways to minimise the tax you pay on your investments, such as:
Pension schemes
When you save into a pension, your contributions are boosted by government tax relief in the following ways:
- Basic rate taxpayers: Receive an extra 20% on contributions.
- Higher rate taxpayers: Get an extra 40% on contributions.
- Additional rate taxpayers: Receive 45% extra.
If you’re withdrawing money from your pension, you’ll normally pay income tax on anything above your 25% tax-free allowance.
Individual savings accounts (ISAs)
You can save into an ISA without paying tax on the returns. However, there is a £20,000 annual limit on the amount you can stash away. This allowance can be used for:
- A cash ISA.
- A stocks and shares ISA.
- An innovative finance ISA.
- A combination of all three.
You can also pay up to £4,000 per year into a Lifetime ISA if you’re eligible for one.
Onshore bonds
With an onshore investment bond, you don’t pay Capital Gains Tax or basic-rate income tax on the money you withdraw because the provider has already paid tax on the income and gains within the bond.
This tax can’t be reclaimed, even if you are a non-taxpayer. Each year, for up to 20 years, you can withdraw up to 5% of your original investment without paying any additional Income Tax at that time, known as your ‘5% allowance.’ Any unused allowance can be carried forward to future years.
However, if you are a higher-rate taxpayer, or if withdrawing from your bond pushes you into a higher tax bracket, you may face an additional tax charge. This can happen on any gain when you finally cash in your bond, or if you exceed your 5% allowance in any year.
It’s essential to understand these tax implications before making any decisions about your future investments. If you’re unsure, consult a tax adviser or seek specialist financial advice. They’ll help you by offering personalised guidance to help you make the most of your investments.
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