Have you earned income from investments, received savings interest, or collected dividends? These are all interconnected ways your money can grow. But did you know that tax on investment income applies to these earnings in the UK? This guide will break down what you need to know about your tax liabilities. By understanding the different types of income, you will learn when and how much tax is to be paid.
Understanding Tax on Investment Income UK
In the UK, investment income does not come without its share of tax implications. Whether you are earning dividends from shares, interest from savings, or profits from property, HMRC expects its cut. Knowing the rules helps you plan better, take advantage of available allowances, and time your investment moves more strategically.
What Counts as Investment Income?
In the UK, HMRC considers several types of returns as taxable investment income. One of the most common is dividends from shares in UK companies. If you own stocks or mutual funds, the payouts you receive from company profits are considered dividend income.
Savings interest also falls under investment income. This includes interest earned from bank accounts, building societies, fixed-rate bonds, and even peer-to-peer lending platforms.
You might also receive returns from corporate bonds (loans you make to companies) or gilts (loans to the UK government). The “interest” you earn from these is also considered investment income.
Similarly, if you invest in unit trusts or open-ended investment companies (OEICs), any interest income these funds pay out to you will be taxable. Keep in mind that if you sell your units or shares in these funds for a profit, that would likely be subject to Capital Gains Tax.
Types of Investment Income and How They Are Taxed
Stock Investment Income Tax
This is a common way to earn income from your stock investments. The good news is that for the current tax year, you get a dividend allowance. For the 2025/26 tax year, this allowance is £500.
If your total dividend income goes above this £500 allowance, you will have to pay tax on the amount that exceeds it. The rate of tax you pay depends on your income tax band for the year:
- Basic Rate: 8.75%
- Higher Rate: 33.75%
- Additional Rate: 39.35%
Tax on Interest Income
You earn interest by contributing to savings or investing in bonds. Profit earned from interests is liable to income tax. Aside from your regular Personal Tax Allowance of £12,570, savings interests are tax-free at the following amounts:
- Basic rate taxpayers – up to £1,000
- Higher-rate taxpayers – £500
Additional rate taxpayers are not entitled to tax-free portions of interest. Income tax rates for the tax year 2025 are as follows (for England, Wales, and Northern Ireland):
| Income Tax Band | Income Threshold | Tax Rate |
|---|---|---|
|
Personal Allowance |
Up to £12,570 |
0% |
|
Basic Rate |
£12,571 to £37,700 |
20% |
|
Higher Rate |
£37,701 to ££125,140 |
40% |
|
Additional Rate |
Over £125,140 |
45% |
Capital Gains Tax
For the current 2025/26 tax year, you can earn up to £3,000 (this is called the annual exempt amount or AEA) before you need to think about paying Capital Gains Tax.
The standard CGT rates for this tax year depend on your income tax band: 10% for basic rate taxpayers and 20% for higher/additional rate taxpayers.
For gains from selling residential property (not your main home) in 2025/26, the rates are 18% for basic rate taxpayers and 24% for higher/additional rate taxpayers.
Good news is that CGT does not apply when you gift assets to your spouse or civil partner, or to a registered charity.
Also, certain types of investments are exempt from CGT, including money held in Individual Savings Accounts (ISAs) and Personal Equity Plans (PEPs).
For more detailed information on this, read our guide on 10 Things You Need to Know to Avoid Capital Gains Tax on Property
If you are unsure how much tax you will owe on dividends, savings interest, or capital gains, using a tax on investment income calculator can help you get a quick estimate based on your income level and investment type.
Tax on Foreign Investment Income
Foreign investment income includes any earnings you receive from assets or investments held outside the UK. This can include:
- Dividends from overseas companies
- Interest on savings in foreign banks
- Rental income from foreign property
- Capital gains from selling foreign assets
Residency-Based Taxation: What Changed?
As of April 2025, the UK has shifted to a residency-based tax system. This means:
- All UK residents, including those previously classified as non-domiciled, must pay UK tax on worldwide income.
- The remittance basis (which previously allowed non-doms to avoid tax on foreign income unless brought into the UK) has been abolished.
- If you’ve lived in the UK for at least 10 out of the last 20 tax years, you’re considered a long-term resident and taxed on all global income.
Reporting Foreign Income to HMRC
To stay compliant, you must report all foreign investment income through HMRC’s Self-Assessment system, just like your UK earnings. The good news is that the UK has double taxation agreements with many countries, so you are not taxed twice on the same income. You can find HMRC’s full list of countries with tax treaties here.
Make sure to include your foreign incomes already taxed overseas, too, to be eligible for the Foreign Tax Credit Relief. Reach out to our professional tax accountants for personalised guidance.
Tax-Efficient Strategies
When it comes to growing your wealth in the UK, tax-efficient investing can make a big difference. By using smart tools like Individual Savings Accounts (ISAs) and pensions, and understanding how to utilise your dividend allowance and capital gains tax (CGT) allowance, you can retain more of your returns.
You can read about them in detail in our guide: Tips to reduce income tax on investments
Maximise Your ISA Benefits
Individual Savings Accounts (ISAs) are a popular way to shield your investment income from tax. For the 2025/26 tax year, you can invest up to £20,000 across all your ISAs without triggering income or capital gains tax.
There are several ISA types, including:
- Cash ISA – Earn tax-free interest.
- Stocks & Shares ISA – Grow your investments without income or CGT.
- Junior ISA – Save for your child’s future tax-free.
- Lifetime ISA – Get a 25% government bonus for retirement or first-home savings.
Pensions as Long-Term Tax Shelters
Self-Invested Personal Pensions (SIPPs) and workplace pensions offer generous tax relief on contributions and allow your investments to grow tax-free until retirement. You can also withdraw 25% tax-free after age 55, making pensions one of the most tax-efficient vehicles available.
Use Your Tax Allowances Wisely
Each tax year, you also get a dividend allowance (currently £500) and a CGT allowance (£3,000). By planning asset sales or dividend payments carefully, you can stay within these limits and avoid paying unnecessary tax. Pairing these allowances with ISAs or pensions makes your investments even more efficient.
Frequently Asked Questions
How do I report my investment income to HMRC?
You report investment income via a Self Assessment tax return if your total taxable income is above £12,570 (the personal allowance for the 2025/26 tax year) or if your untaxed investment income is over £2,500. The deadline for online returns is January 31st following the end of the tax year.
What are the penalties for not declaring my investment income?
Penalties for late filing of your tax return start from a fixed penalty of £100, which increases the longer you delay. There are further penalties after 3, 6, and 12 months of lateness. HMRC differentiates between careless, deliberate, and deliberate and concealed behaviour. Penalties are higher for more serious reasons.
Is income from peer-to-peer lending taxed?
Yes, the interest earned from peer-to-peer lending is taxed as savings income. This means it is subject to income tax, but you will benefit from the Personal Savings Allowance: up to £1,000 tax-free for basic rate taxpayers, £500 for higher rate taxpayers, and £0 for additional rate taxpayers.
Do I need to pay tax on investment income held in a child's name?
Generally no, if the child’s total taxable income, including investment income, is below the personal allowance (currently £12,570 for the 2025/26 tax year). However, if a parent gifts money to a child and it generates more than £100 in gross income in a tax year, that income is taxed as the parent’s income.
What kind of records should I keep for my investments for tax purposes?
Keep records of purchase and sale dates and prices to calculate capital gains or losses, dividend and interest statements to verify income received, and any costs associated with buying or selling investments. It’s best to keep these records for at least six years after the end of the tax year they relate to.
