Profits from investments have come under the microscope of successive governments seeking to raise revenue, and are now more likely to be taxed than in the not so distant past.
Dividend and capital gains tax (CGT) allowances have been drastically cut in recent years, and the tax rates on them hiked, leaving investors footing more of the bill for assets that perform well.
In the last three months of 2024 alone, we paid £808 million in capital gains tax. That’s up 46% compared to the same period last year.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Get 6 issues free
Sign up to Money Morning
Don’t miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don’t miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Putting money into pensions and ISAs are two of the best ways to avoid tax on your investments. In a pension, the money grows tax-free and is only subject to income tax when it is withdrawn. With ISAs, there’s no tax on investment gains or withdrawals.
ISAs were on track to save us an estimated £9.4 billion in income tax and capital gains tax in 2024/25, according to analysis of HMRC data by Hargreaves Lansdown.
The new tax year resets the ISA allowance back to £20,000, so it is worth thinking about how to use it to keep more of your investment gains.
But it’s also important to make sure you’re taking advantage of all of the other tax-free allowances available to UK investors. This guide explains them all – and, when paying tax on investment profits is unavoidable, how much you’ll owe.
What is dividend tax?
You pay dividend tax if you receive dividends from company shares you own (if you own them outside of an ISA). You would also pay dividend tax if you are self-employed with your own limited company and pay yourself in dividends from that company.
The amount your dividends are taxed depends on which income tax band you fall into. To work out your tax band, add your total dividend income to your other income.
For basic rate taxpayers, dividends are taxed at 8.75%. For higher rate taxpayers it is 33.75%. Additional rate taxpayers pay 39.35%.
Dividends are taxed last, after any other income you receive. So you may pay tax at more than one rate.
There is no dividend tax to pay on income that falls within your personal allowance (the amount of total income you can earn each year without paying tax). Currently the personal allowance is £12,570. But if you have a salary or pension income that will probably be used up.
Dividend tax allowance
You also get a dividend allowance each year. You only pay tax on any dividend income above the dividend allowance. The allowance has been drastically cut in recent years, from £5,000 in 2017/18 to just £500 in 2025/26.
Camilla Esmund, senior manager at interactive investor, says: “With the dividend allowance standing at £500, even modest portfolios could face unnecessary tax bills. To keep things simple and stress-free, think about holding dividend-paying assets inside ISAs or SIPPs, where returns can snowball tax-free.”
What is capital gains tax?
Capital gains tax (CGT) is a tax you pay when you turn a profit (make a gain) on an asset when you sell it (or ‘dispose of it’ in the language of HMRC).
You pay CGT if you make a gain when you sell what are known as ‘chargeable assets’. These include:
- most personal possessions worth £6,000 or more, apart from your car
- property that’s not your main home
- your main home if you’ve let it out, used it for business or it’s very large
- any shares that are not in an ISA or PEP
- business assets
You may also have to pay CGT if you sell or giveaway cryptocurrency, like Bitcoin.
If you sell an asset you jointly own with someone else, then you have to pay CGT on your share of the gain.
How much CGT you pay depends on which income tax band you’re in.
From 6 April 2025 onwards, basic rate taxpayers pay 18% tax on gains from residential property excluding main residence and other chargeable assets. For higher rate and additional rate taxpayers it is 24%.
There is also a 32% rate on gains from ‘carried interest’ if you manage an investment fund, which applies whatever your income tax band.
From 6 April 2025, the rate of CGT that applies to business asset disposal relief and investors’ relief – on the disposal of shares in a trading company that is not listed on a stock exchange – increased from 10% to 14%. This is set to increase again on 6 April 2026 to 18%.
Capital gains tax allowance
You only have to pay CGT on total gains above your tax-free allowance, known as the annual exempt amount. This has been heavily cut in recent years. The CGT tax-free allowance is £3,000 for 2025/26.
Camilla Esmund, senior manager at interactive investor, says: “Any gains realised above the £3,000 limit are taxable. To reduce the impact, consider holding investments in ISAs or pensions, which shield your profits from CGT.
“It could also be worth splitting sales of investments across multiple tax years to make use of more than one £3,000 allowance. This approach can also help keep you within a lower tax bracket.”
Depending on the asset, you may be able to reduce any tax you pay by claiming what is known as a ‘relief’.
How does income tax on interest work?
If you invest in bonds, peer-to-peer lending, unit trusts, investment trusts or open-ended investment companies, you may need to pay tax on the interest you receive. Likewise if you have cash in the bank or a savings account earning interest.
Income tax on interest is charged at the same rate as income tax on earnings – 20% for basic rate taxpayers, 40% for higher, and 45% for additional.
Yearly allowances mean most people can earn some interest on their savings and investments without having to pay tax. The three allowances that come into play are the personal allowance, the starting rate for savings and the personal savings allowance.
Your personal allowance – £12,570 in 2025/26 – is how much you can receive in total income without paying income tax. So if you haven’t used this up on what you get in salary or pension income, for example, you can use it to cover your interest income.
The starting rate for savings lets you get up to £5,000 in interest a year tax-free. But this allowance decreases the more you earn in other income – for every £1 you get above your personal allowance your starting rate for savings is cut by £1. If your other income is £17,570 or more you don’t get the starting rate for savings at all.
Finally, the personal savings allowance means basic rate taxpayers can earn £1,000 in interest without being taxed, and higher rate taxpayers can earn £500. There’s no personal savings allowance for additional rate taxpayers.
More than two in five (44%) savers say they don’t understand their personal savings allowance, according to research in 2024 from Shawbrook.
Adam Thrower, head of savings at Shawbrook, says: “It’s astonishing how many people are inadvertently leaving their wallets wide open for the taxman. Hundreds of thousands of savers remain unaware that the interest they accrue on their savings is subject to tax. The result? Their pockets will end up less full than anticipated.
“People need to be looking at their interest rate and how much they are due to earn in interest this year and consider making use of ISA allowances to earn tax-free interest.”
Stamp Duty and Stamp Duty Reserve Tax (SDRT)
When you buy individual shares in a company incorporated in the UK, you usually pay a tax or duty of 0.5% on the transaction.
If you buy the shares electronically, you’ll pay what is known as stamp duty reserve tax (SDRT). Similarly, if you buy shares using a stock transfer form, you’ll pay stamp duty if the transaction is over £1,000.
You do not have to pay tax if you are given shares for nothing or subscribe to a new issue of shares in a company.
There’s also no tax to pay if you buy shares in an ‘open ended investment company’ (OEIC) from the fund manager, or buy units in a unit trust from the fund manager.
Tax on property income
Income from rental properties is taxed at the same rate as income tax – so 20% for basic rate taxpayers, 40% for higher and 45% for additional.
However, the first £1,000 of your income from property rental is tax-free. This is your property allowance.
You have to report any buy-to-let (BTL) rental income to HMRC on a self-assessment tax return if it’s more than £2,500 after allowable expenses or £10,000 before allowable expenses.
Allowable expenses are things like letting agents fees, services charges and ground rent, and any costs you incur in the day-to-day running of the property.
Landlords can also benefit from a 20% tax credit on their buy-to-let mortgage interest payments, though this is less generous than it used to be.
If the rental property is owned in a limited company structure you count the rental income the same way as any other business income, and pay tax accordingly.
Holly Tomlinson, financial planner at Quilter, says financial planning and budgeting are essential before diving into BTL investing.
“Beside just your deposit, you must factor in initial costs such as legal fees, stamp duty, property surveys and potential renovation costs. Ongoing costs include maintenance, insurance property management fees if you use an agent and the cost of periods when the property might be vacant.
“There are also tax implications including income tax on rental income and capital gains tax when selling the property. Recent changes in tax relief for mortgage interest can also affect profitability.”
