If you’re earning income from investments—whether it’s from dividends, savings interest, or property returns—you may be subject to tax. In the UK, these types of income are taxed, and understanding how it works can help you manage your financial planning more efficiently. This blog breaks down the key aspects of tax on investment income, helping you navigate your liabilities and find ways to optimize your tax position.
What Counts as Investment Income?
Investment income includes a range of earnings from different sources. Common types of investment income in the UK include:
- Dividends: Earnings from shares in UK companies or mutual funds.
- Savings Interest: Income from bank accounts, fixed-rate bonds, peer-to-peer lending, and building societies.
- Bonds: Interest earned from corporate bonds or government gilts (loans made to companies or the government).
- Returns from Investment Funds: Income from unit trusts, OEICs (open-ended investment companies), or other investment funds is also taxable.
It’s important to note that while income from some investments, like ISAs, may be tax-free, others, such as profit from selling shares or funds, may trigger Capital Gains Tax (CGT).
How is Investment Income Taxed?
Different types of investment income are taxed in distinct ways, and the rate you pay depends on your income tax band.
Tax on Dividends
Dividend income is taxed based on your total earnings for the year, and for the 2025/26 tax year, there is a dividend allowance of £500. If your dividend income exceeds this amount, the excess is taxed according to your income tax band:
- Basic Rate (20%): 8.75%
- Higher Rate (40%): 33.75%
- Additional Rate (45%): 39.35%
Tax on Interest
Interest income, such as savings or bond interest, is also subject to tax. The amount of tax-free interest depends on your income tax band:
- Basic rate taxpayers: Up to £1,000 in interest is tax-free.
- Higher rate taxpayers: £500 tax-free.
- Additional rate taxpayers: No tax-free allowance.
Interest income is taxed alongside other earnings, with the following income tax rates for 2025:
- Personal Allowance: Up to £12,570, taxed at 0%.
- Basic Rate: £12,571 to £37,700, taxed at 20%.
- Higher Rate: £37,701 to £125,140, taxed at 40%.
- Additional Rate: Over £125,140, taxed at 45%.
Capital Gains Tax (CGT)
When you sell investments such as stocks or property (other than your main home), any profit you make may be subject to CGT. For the 2025/26 tax year, the annual exempt amount (AEA) is £3,000, meaning you can earn up to this amount in gains before CGT kicks in.
CGT rates depend on your income tax band:
- Basic rate taxpayers: 10%
- Higher and additional rate taxpayers: 20%
For residential property (not your main home), the rates are higher:
- Basic rate taxpayers: 18%
- Higher and additional rate taxpayers: 24%
CGT does not apply to gifts made to a spouse or civil partner or to registered charities. Additionally, certain investments, like ISAs, are exempt from CGT.
Tax on Foreign Investment Income
Foreign investment income, such as dividends from overseas companies or rental income from foreign property, is also taxable in the UK. As of April 2025, the UK will operate a residency-based tax system, meaning all UK residents must pay UK tax on their worldwide income, regardless of where the income originates.
You must report all foreign income through HMRC’s Self-Assessment system, and the UK has agreements with many countries to prevent double taxation. If you’ve already paid tax on your foreign income abroad, you may be eligible for Foreign Tax Credit Relief.
Tax-Efficient Investment Strategies
There are several strategies you can use to reduce your tax liability on investment income. By leveraging certain tax-efficient investment vehicles, you can maximize your returns and reduce the tax you owe.
Maximize Your ISA Benefits
One of the best ways to avoid tax on investment income is by using Individual Savings Accounts (ISAs). For the 2025/26 tax year, you can contribute up to £20,000 across all your ISAs without incurring tax on interest, dividends, or capital gains. Types of ISAs include:
- Cash ISAs: Tax-free interest on savings.
- Stocks & Shares ISAs: Tax-free growth on investments and dividends.
- Junior ISAs: A way to save tax-free for your child’s future.
- Lifetime ISAs: For retirement or first home savings with a 25% government bonus.
Pensions as Tax Shelters
Pensions, particularly Self-Invested Personal Pensions (SIPPs), are another powerful tool for tax-efficient investing. Contributions to pensions receive tax relief, and your investments grow without being taxed until you retire. Additionally, when you withdraw 25% of your pension after age 55, it is tax-free.
Using Tax Allowances
You can also maximize your dividend allowance (£500 for the 2025/26 tax year) and CGT allowance (£3,000) by strategically planning when to sell assets or receive dividends. If you can manage your earnings within these thresholds, you can avoid paying unnecessary tax.
Conclusion
Understanding how investment income is taxed in the UK is key to effectively managing your finances and planning for the future. By taking advantage of tax-efficient investment strategies like ISAs, pensions, and managing your allowances wisely, you can significantly reduce your tax liabilities and keep more of your returns. Whether you’re dealing with dividends, interest, or capital gains, having a solid grasp of the rules will help you make informed decisions and grow your wealth more efficiently.
