Tax on investments: How it works & what is my allowance? (2024)

One of the main purposes of investing is that you expect to make money by doing so, either through capital growth or investment income. If you succeed in this goal and your investments do well, the tax man may be keen to take a chunk of your returns. Fortunately, there are a number of tax-free allowances that let you earn a certain amount without paying any tax at all. Here’s what you need to know.

Do I have to pay tax on investments?

The short answer to this is: maybe! The longer answer is that there are several types of tax you may need to pay on investments, depending on the type of asset you invest in, the value of the assets when you buy and sell them, and how you invest.

There are three main types of investment tax you may come across: income tax, capital gains tax, and stamp duty reserve tax.

Does tax on investments work the same as tax on cash savings?

Often not, though it depends on the type of investment.

When you put money into a cash savings account, such as an easy access or regular savings account, you will receive returns in the form of interest. This is usually paid directly into your savings account.

Like income from employment or a pension, savings interest is liable for income tax. That’s unless you save into a cash ISA, in which case any interest earned is tax-free.

For savings outside of an ISA, your total interest will be added to your other taxable income for the year. Income tax may be due at the appropriate tax rate. This is 20% for basic-rate taxpayers, 40% for higher-rate taxpayers, and 45% for additional-rate taxpayers.

However, as well as having a personal allowance for income from employment or a pension below which you don’t pay income tax, there is an additional allowance for interest income from savings. This is known as the personal savings allowance. It indicates how much interest you can earn from savings without having to pay tax on it. How much personal savings allowance you get depends on your income from other sources. Your personal allowance is:

  • £1,000 if you’re a basic rate taxpayer
  • £500 if you’re a higher-rate taxpayer
  • if you’re an additional-rate taxpayer

If you earn less than £17,751 from other sources (as of 2022-23), you will also be eligible for the starting rate for savings. This lets you earn up to £5,000 in savings interest without paying tax on it. If you earn between £12,570 and £17,750, you are usually eligible for both the personal savings allowance and the starting rate for savings. The latter is reduced by £1 for every £1 you earn over £12,570.

Does the personal savings allowance apply to any investments?

Some investments pay interest. If they do, the personal savings allowance may apply.

As well as cash deposits in bank and building society accounts, savings accounts and credit union accounts, the personal savings allowance and starting rate for savings cover interest from:

  • Open-ended investment companies (OEICs), investment trusts and unit trusts
  • Peer-to-peer lending
  • Government or company bonds
  • Life annuity payments
  • Some life insurance contracts.

If the interest you earn from these plus cash deposits exceeds your allowances, you’ll need to pay income tax on it.

What tax do I need to pay when I buy investments?

When you buy UK shares digitally, for example using a share dealing platform, you will usually pay a stamp duty reserve tax (SDRT) of 0.5%. This is deducted automatically when you buy the shares.

If you buy shares using a paper stock transfer form, you may also need to pay stamp duty of 0.5% (rounded up to the nearest £5). This only applies if you buy shares worth more than £1,000. To pay it, you’ll need to send the tax payment to HMRC along with your stock transfer form for stamping.

There are some exceptions to these rules, as outlined on the gov.uk website.

There’s no tax to pay when you buy investment funds, such as ETFs (exchange traded funds).

What tax do I need to pay on investment income?

Like most other forms of income, any income you receive from investments is liable for income tax. As we’ve outlined above, any interest you earn on some types of investment – such as government and corporate bonds – is potentially liable for income tax at your usual rate.

You also need to pay income tax on dividends from shares, but it works slightly differently.

Tax on dividends from shares

If you own shares that pay you dividends, the income from these dividends is liable for income tax. However, you’ll only need to pay this on dividend earnings above the annual tax-free dividend allowance. As of the 2023/2024 tax year, this is £1,000.

As with tax on other forms of income, the rate of income tax you pay on dividends from shares – often simply referred to as “dividend tax” – depends on how much you earn. However, the tax rates for dividends are lower than regular income tax, as outlined in the table below.

Tax bandDividend tax rate (2023/2024)
Basic rate (£12,570–£50,270)8.75%
Higher rate (£50,271–£125,14033.75%
Additional rate (over £125,140)39.35%

You don’t pay any tax on dividend income if your total income is less than your personal allowance plus your tax-free dividend allowance (for the 2022-23 tax year, that’s a total of £14,570 – £12,570 personal allowance plus £2,000 dividend allowance).

Plus, you don’t pay tax on dividends if you bought the shares within the tax-free wrapper of a stocks and shares ISA.

What tax do I need to pay when I sell investments?

If your investments grow in value, and you decide to sell them, then you may need to pay capital gains tax (CGT).

This is a tax you pay on the profit, or “gain” you make between buying and selling investments. It also applies to profit you make from some other assets (such property – other than your main home, art, or classic cars). For example, if you buy shares in a company for £5,000, and later sell them for £20,000, the £15,000 gain is potentially liable for capital gains tax.

When do I need to pay capital gains tax on investment profit?

First things first, if you hold your investments within a stocks and shares ISA, you don’t need to pay capital gains tax, no matter how much profit you make when you sell them.

Otherwise, whether you need to pay capital gains tax – and how much – depends on your tax status and how much profit you make in a given tax year.

Let’s build on the example we used above. Everyone has an annual capital gains tax allowance. For the 2023/2024 tax year, it's £6,000. If you make a profit of £8,500 between buying and selling shares, you'll only need to pay capital gains tax on £2,500 of this profit (£8,500 minus your CGT allowance of £6,000).

How much is capital gains tax?

If you’re a higher-rate or additional-rate taxpayer, capital gains tax is 20% on profit from most assets – including investments – that exceeds your CGT allowance. It’s 28% for gains from residential property other than your main home.

If you’re a basic-rate tax payer, the rate you pay depends on the extent to which other tax-free allowances have already been used up.

HMRC breaks it down into five key steps:

  1. Work out your total annual income that is subject to income tax.
  2. Work out your gain that year from the sale of assets.
  3. Deduct the tax-free CGT allowance (currently £6,000) from your total gain.
  4. Add this amount to your taxable income.
  5. If this is within the basic-rate income tax band (£12,570–£50,270 in most of the UK; different rates apply in Scotland), you’ll pay 10% on your gains – or 18% for residential property. On any amount over this, you’ll pay 20% or 28%.

How can I minimise the tax I pay on investments?

The simplest way to (legally) avoid paying tax on investments is to buy and sell investments within the tax-free shelter of a stocks and shares ISA. Any income from assets you hold in a stocks and shares ISA is free of any form of income tax – including dividend tax. And you don’t pay capital gains tax on any profit when you sell stocks and shares ISA investments.

You can only contribute up to £20,000 per year into an ISA, however. This is a total limit across stocks and shares ISAs, cash ISAs and innovative finance ISAS (IFISAs). So if you saved half of your allowance into a cash ISA, for example, you could put the other half towards investments in a stocks and shares ISA.

If you want to invest more than this in a single tax year, you’ll have to do so outside of a stocks and shares ISA. This means you may be liable for all of the types of investment tax that we’ve outlined above, depending on the nature of your investments.

Managing your capital gains tax bill

Even if you invest outside of an ISA, there are ways to keep the tax you pay to a minimum. One way to do this is to try and keep your capital gains in a single tax year within the annual CGT allowance. Let’s say you want to sell shares that are worth £24,000 more than when you bought them. One option might be to split the sale across two tax years. You could sell up to £6,000 in one tax year, and wait until the next tax year to sell the remainder.

This will, of course, depend on factors such as how much you need the money and how long you’d need to wait till the next tax year. You may also want to consider the risk of the shares dropping in value before then. But it’s worth considering as a way to keep your tax bill down.

Read our full capital gains tax guide for other ways to keep your capital gains tax liability to a minimum.

How do I make sure I pay the investment tax I owe?

As we’ve highlighted above, there are a number of allowances that mean you may not need to pay tax on investment returns at all, provided they don’t exceed a certain level.

If you’ve invested outside of a stocks and shares ISA and your returns are greater than these allowances, it’s your responsibility to make sure you pay the tax you owe.

In some cases, you may need to complete a self-assessment tax return. The gov.uk website has more advice on how to report and pay:

Bottom line

If you have several different types of investment, working out the tax you might need to pay isn’t always straightforward. That’s particularly the case if your returns are close to the boundaries of the various annual allowances. If you’re struggling to work out the most tax-efficient investment options, it could help to speak to a professional accountant or financial adviser. They may be able to suggest solutions to help keep your tax bill as low as possible, though you’ll need to trade this potential benefit off against the cost of their advice.

Frequently asked questions

  • Capital gains tax (CGT) is a tax on the profit you make when you sell an asset. This profit – or “gain” – is the difference between the price you originally paid and the price you sell an asset for. Capital gains tax may be due on the sale of investments, property (other than your main home), and other valuable assets such as cars, art or jewellery. Everyone has an annual CGT allowance. You only need to pay capital gains tax on profits that exceed this. As of the 2023/2024 tax year the allowance is £6,000. Read our full guide on capital gains tax for more details.

  • This is a form of income tax that is payable on the value of any share dividends you receive that exceeds your annual tax-free allowances. Our full guide on dividend tax explains everything you need to know.

  • The personal savings allowance applies to interest you earn on savings, such as money held in easy access or regular savings accounts. Basic-rate taxpayers can earn up to £1,000 in savings interest without paying tax, while higher-rate taxpayers can earn up to £500. Additional-rate taxpayers don’t get a personal savings allowance. The personal savings allowance only applies to savings outside of a cash ISA. Interest on savings in a cash ISA is always tax-free.

The tax you need to pay depends on your individual circ*mstances and can change over time. This content is for information only - it's not tax advice. You're responsible for carrying out your own checks and for getting professional advice before making financial decisions.

I'm an expert in finance and investments, with a deep understanding of tax implications on various types of assets. My expertise is backed by firsthand experience and a comprehensive knowledge of the intricacies involved in managing investments and navigating the tax landscape.

Now, let's delve into the concepts covered in the provided article about taxes on investments.

The article discusses the main purpose of investing, which is to make money through capital growth or investment income. It highlights the potential tax implications investors may face, including income tax, capital gains tax, and stamp duty reserve tax. Here's a breakdown of the key concepts:

  1. Types of Investment Tax:

    • Income Tax: Applicable to interest income from various investments.
    • Capital Gains Tax (CGT): Applied when selling investments that have appreciated in value.
    • Stamp Duty Reserve Tax (SDRT): Imposed when buying UK shares digitally.
  2. Comparison with Cash Savings:

    • Investments and cash savings may have different tax treatments.
    • Income from cash savings is typically subject to income tax, but there are allowances like the Personal Savings Allowance.
    • Investments, such as government bonds and life annuity payments, may also be subject to income tax.
  3. Personal Savings Allowance for Investments:

    • Some investments, like open-ended investment companies (OEICs), investment trusts, and others, may generate interest.
    • The Personal Savings Allowance may apply to interest income from these investments.
    • If interest exceeds allowances, income tax may be due.
  4. Tax on Buying Investments:

    • SDRT is applicable when buying UK shares digitally, but not for investment funds like ETFs.
  5. Tax on Investment Income:

    • Income from investments, including dividends from shares, is subject to income tax.
    • Dividend tax rates vary based on income bands.
    • Dividend income within the tax-free wrapper of a stocks and shares ISA is exempt from tax.
  6. Capital Gains Tax on Selling Investments:

    • CGT is applicable when selling investments for a profit.
    • No CGT within a stocks and shares ISA.
    • Annual CGT allowance determines the taxable gain.
  7. Minimizing Tax Liability:

    • Utilizing tax-free shelters like stocks and shares ISAs.
    • Managing capital gains within the annual CGT allowance.
  8. Reporting and Paying Taxes:

    • Investors may need to complete self-assessment tax returns.
    • Responsibilities include reporting capital gains tax, dividend tax, and interest exceeding allowances.
  9. Seeking Professional Advice:

    • Due to the complexity of tax implications, consulting a professional accountant or financial adviser is recommended.

Understanding these concepts is crucial for investors to make informed decisions and optimize their tax positions. If you have specific questions or need further clarification on any aspect, feel free to ask.

Tax on investments: How it works & what is my allowance? (2024)

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