How investments are taxed

Investments held outside a tax wrapper generate two kinds of taxable return: capital gains when you sell for more than you paid, and income while you hold them, mainly dividends from shares and funds. Capital Gains Tax is a tax on the profit when you sell something that has increased in value, not on the whole sale price¹. Dividend income is taxed at your dividend rate, but only above a £500 allowance each year². Interest from investments, such as interest on cash held in a general investment account, is taxed as savings income under the normal savings rules.

The headline numbers for a UK resident investing in a general investment account are simple to state. Each person can make £3,000 of gains each tax year before Capital Gains Tax applies³. Above that, gains on shares and funds are taxed at 18% if you are a basic rate Income Tax payer and 24% if you are a higher rate payer³. Dividends are taxed at 8.75%, 33.75% or 39.35% depending on your Income Tax band, but only on dividends above the £500 allowance⁴. Money held inside an ISA or a pension is treated differently: returns there are free from UK Income Tax and Capital Gains Tax⁵.

Which investment returns are taxed, and how

Three kinds of return can arise from investments held in a general investment account, and each is taxed under its own rules.

Capital gains. You pay tax if you made a profit on selling, or "disposing of", certain assets, such as shares or a second home¹. A disposal is not only a sale on the market: giving shares away, swapping them in a takeover, or transferring them out of a wrapper can each count. The tax falls on the profit, the gain, not on the proceeds, and only on gains above the annual exempt amount¹.

Dividends. Companies pay dividends out of profits to shareholders, and funds pass through the dividends they receive. Dividend income is taxed at dedicated dividend rates rather than the normal Income Tax rates, with the first £500 each year taxed at 0%². How dividends work, including when you become entitled to them, is covered in how dividends work.

Interest. Interest earned on cash held on an investment platform, or on bonds and gilts, is savings income. After the end of the tax year, your bank or building society tells HMRC how much interest you earned, and where the amount is £10,000 or less the tax is usually collected automatically through your tax code⁸. If you earn more than £10,000 in savings interest, you must tell HMRC on a Self Assessment tax return, and HMRC will send you a notice to file one if your bank reports that you crossed that threshold⁸.

Where you hold the investments matters as much as what they are. A UK resident pays UK tax on UK income and gains, and on foreign income and gains, although relief may be available in some circumstances⁹. Compensation payments that are then invested are also caught: under the Infected Blood Payment Scheme in Northern Ireland, once money from the scheme is invested, any interest received on that investment is taxable in the normal way and should be declared in tax returns¹⁰.

ISAs and pensions: where gains and dividends are tax-free

The two main tax wrappers change the picture completely. With an ISA, any returns you earn are free from UK Income Tax and Capital Gains Tax⁵. All interest received on assets held within ISAs is entirely tax free, and the same applies to dividends and capital gains while the money stays in the ISA¹¹. Official statistics describe ISAs as tax exempt accounts under which any income received in the form of interest or dividends, and any capital gains, are free of tax².

This means the whole apparatus of allowances, rates and reporting in the rest of this page does not apply to money inside an ISA. There is no Capital Gains Tax to work out when you sell, no dividend allowance to use up, and nothing to report to HMRC about the returns. The trade-off is the ISA subscription limit on how much you can put in each year, which is covered in the ISAs section.

Pensions work in a similar direction. Money in a workplace or personal pension grows free of tax on investment returns, and tax is instead charged when you take the money out in retirement, under the rules described in the pensions section¹². An annual allowance tax charge can arise in some circumstances, and paying that charge means completing a Self Assessment tax return¹².

Choosing where to hold investments, and what happens when you move them between wrappers, is covered in where investments can be held and in whether transferring investments triggers Capital Gains Tax.

Capital Gains Tax is a tax on the profit, not the sale price

The most common misunderstanding about Capital Gains Tax is that it falls on the amount you sell for. It does not. Capital Gains Tax is a tax on the profit when you sell something that has increased in value¹³. If you buy shares for £4,000 and sell them for £5,500, the gain is £1,500, not £5,500.

Working out the gain starts from what you bought and sold the asset for, and the dates you took ownership and disposed of it. You can also take into account other relevant details, such as the costs of buying, selling or making improvements, and any tax reliefs that apply¹⁴. Dealing charges and stamp duty on shares are part of the cost story, and the records you need are the ones described in consolidated tax certificates and other investment documents.

You only pay Capital Gains Tax on profits above your Annual Exempt Amount¹. So a gain that sits within the £3,000 allowance for the year produces no tax and, for shares, no payment, though it may still need to be reported if you are within Self Assessment.

Not everything that rises in value is caught. The rules for personal possessions, sometimes called "chattels", tax a disposal only where the proceeds reach £6,000 or more, and your car is excluded unless you have used it for business¹³. Where a possession is jointly owned, you are exempt from paying tax on the first £6,000 of your share¹³. UK property has its own regime: you may have to pay Capital Gains Tax if you make a gain when you sell property that is not your home, for example buy-to-let properties, business premises, land or inherited property, though you may get tax relief if you sold a property that was your main home¹⁵.

The £3,000 annual exempt amount

Every individual, and every personal representative dealing with an estate, can make £3,000 of chargeable gains each tax year before Capital Gains Tax becomes payable³. Most trustees get half that, £1,500³.

The allowance has been cut sharply in recent years. Official statistics record the policy decisions to decrease the dividend allowance from £2,000 to £500 and the capital gains annual exempt amount down to its current level¹⁶. The Autumn Budget 2024 documents confirm the £3,000 figure for individuals and personal representatives⁴.

Two practical points follow from the size of the allowance. First, because £3,000 is small, a single successful sale can push a modest investor over the threshold, which is why gains that would once have been untaxed now generate a reporting obligation. Second, the allowance cannot be carried forward: it applies per tax year, so a gain realised in one year cannot be sheltered by an unused allowance from an earlier one. Some investors time sales across the end of a tax year so that two years' allowances are available, though whether that suits anyone depends on their circumstances and on the market.

Capital Gains Tax rates: 18% or 24% depending on your income tax band

For gains on assets other than residential property and carried interest, which includes shares and funds, the rates are 18% for an Income Tax basic rate payer and 24% for a higher rate payer³. Which band applies to you is decided by your taxable income for the year, including the gain itself in the calculation, so a large gain can push part of it into the higher rate.

Special rates apply in particular cases. Gains on carried interest are taxed at 32%³. Gains that qualify for Business Asset Disposal Relief and Investors' Relief are taxed at 14%¹⁸, and the rate on qualifying disposals to employee ownership trusts was reduced from 100% to 50% from 26 November 2025¹⁹. These reliefs matter mainly to business owners and employees holding shares in their employer, a case covered by HMRC's helpsheet on Capital Gains Tax and employee share schemes for the 2025 to 2026 tax year²⁰.

Rates change at fiscal events. The rate for Business Asset Disposal Relief and Investors' Relief was increased from 10% to 14% for disposals made on or after 6 April 2025, and from 14% to 18% for disposals made on or after 6 April 2026¹⁶. Anyone working out a bill should check the current rates rather than relying on a figure from an earlier year.

Dividend tax rates and the £500 dividend allowance

Dividend income is taxed at its own rates, which sit above the £500 allowance. For dividends otherwise taxable at the basic rate, the rate is 8.75%; at the higher rate, 33.75%; and at the additional rate, 39.35%⁴.

The allowance has fallen repeatedly. It applied to the first £5,000 of an individual's income in 2016-17 and 2017-18, and to the first £2,000 in 2018-19 and 2019-20²¹. The UK dividend allowance then reduced from £1,000 in 2023-24 to £500 in 2024-25²², and official statistics record the policy decision to decrease it from £2,000 to £500¹⁶.

Technically, the "allowance" is not a deduction at all. It is a 0% tax rate inserted into the Income Tax Act, properly called the "dividend nil rate"²¹. The practical effect is the same for most people: the first £500 of dividends each year produces no tax. But because it is a rate band rather than an exemption, dividends within it still count as income, which can matter for how other income is taxed and for things like the High Income Child Benefit Charge.

Scottish taxpayers pay the same tax as the rest of the UK on dividends and on savings interest²³. The Scottish Parliament sets the rates and bands for Scottish Income Tax on wages, pensions and most other taxable income²⁴, and those bands differ from the rest of the UK: in the 2026 to 2027 tax year, a Scottish taxpayer earning £50,000 pays 42% higher rate tax on income between £43,663 and £50,000²⁵. But the dividend rates and the Capital Gains Tax rates are UK-wide, so the tables on this page apply whatever nation you live in.

Gifts, spouses, inheritance and death: when no tax is due

Several transfers escape Capital Gains Tax altogether, or defer it.

Spouses and civil partners. You do not usually need to pay tax on gifts to your husband, wife, civil partner or a charity¹⁵. Transfers between spouses and civil partners, including after death, are also exempt from Inheritance Tax, as are gifts to a registered UK charity²⁶.

Inheritance. Inheriting is not a chargeable event for Capital Gains Tax purposes. What you may have to pay is Capital Gains Tax when you sell anything you inherited²⁷. Inheritance Tax itself is a separate tax on the estate, and no Inheritance Tax is due where the value of the estate is below the threshold²⁸. mygov.scot notes that people who inherit property, money or shares may have to pay other types of tax on what they have inherited, including Income Tax and Capital Gains Tax²⁸. So the tax on inherited investments falls at two points: Inheritance Tax when the estate passes, if the estate is large enough, and Capital Gains Tax when the beneficiary later sells.

Joint ownership. Joint owners are treated as having equal shares. Where an asset is owned jointly with a spouse or civil partner, each owner enters half the gain on their own return²⁹. The same equal-shares rule appears in HMRC's helpsheet on gains on UK life insurance policies³⁰. In practice this means a jointly held portfolio delivers each half of any gain, and each half is set against that person's own £3,000 allowance and own tax rates, which can keep both spouses under the threshold where a single owner would cross it.

Death. On death, assets generally pass to the estate rather than being disposed of, so no Capital Gains Tax arises at that point; the estate's personal representatives have their own £3,000 annual exempt amount³.

Losses, reliefs and takeovers

Losses. Losses you make on disposals can be set against gains in the same tax year, reducing the amount chargeable above the allowance. There are exceptions: under the Child Trust Fund Regulations, losses accruing on any disposal of account investments are disregarded for capital gains tax purposes³¹. And where the Financial Ombudsman Service tells a business to compensate you for investment or pensions loss, the business will not deduct capital gains tax for you, so the tax treatment of any compensation is something to check separately³².

Reliefs for higher-risk investment. The Seed Enterprise Investment Scheme offers Capital Gains Tax relief on 50% of the amount invested, capped at £100,000³³. These schemes, and their risks, are covered in EIS and SEIS and venture capital trusts.

Takeovers and reorganisations. When a company you own shares in is taken over, reorganised or merged, the shares you receive in exchange are often not treated as a disposal, so no gain crystallises at that point. But where a takeover includes cash as well as shares, part of the deal can be chargeable. HMRC's guidance on share reorganisations, takeovers and mergers sets out an election you can make in your tax return where the cash you receive exceeds the original cost of your shares: you must elect to do this, and it will reduce the cost of your new shares to nil³⁴. What happens to your shares in a takeover is explained in takeovers and share reorganisations.

How to report and pay Capital Gains Tax and dividend tax

The first thing to know is that HMRC does not do the work for you. You do not get a bill for Capital Gains Tax⁶. You work out your own liability, report it, and pay it by the deadline.

For shares and other non-property assets, the route is Self Assessment. You need to pay your Self Assessment tax bill by midnight on 31 January following the tax year you are paying for⁷. The same deadline applies to shares from employee schemes: Capital Gains Tax on shares sold under a Share Incentive Plan is payable on 31 January after the end of the tax year in which the shares are sold³⁶. You can file your tax return online, and 97% of people already do it this way³⁵.

The records you need are the ones HMRC asks for when you report: details of how much you bought and sold the asset for, the dates you took ownership and disposed of it, other relevant details such as costs of buying, selling or making improvements and any tax reliefs, and your calculations for each capital gain or loss you report¹⁴.

Property is different. How you report and pay your Capital Gains Tax depends on whether you sold a residential property in the UK¹⁴. For most sales of UK property on or after 6 April 2020, you must report and pay the Capital Gains Tax within 60 days¹⁵. Non-UK residents must report all sales of UK property or land, residential and non-residential, even if they have no tax to pay, and they do not need to report or pay tax on anything else that has increased in value¹⁴. Non-UK residents normally do not pay tax when they sell an asset, apart from on UK property or land³⁷.

Dividends follow the income routes rather than the gains routes. If you already send a Self Assessment tax return, you report your dividends there, alongside savings interest⁸. If you do not, HMRC may adjust your tax code to collect the tax through PAYE. Reforms announced for Self Assessment point in the same direction: where possible, HMRC will update your tax code, which will determine how much Self Assessment tax is collected through your PAYE income, and HMRC will use your most recent tax return to forecast your payments³⁸.

Foreign investment income and offshore funds

Foreign income is anything from outside England, Scotland, Wales and Northern Ireland, and the Channel Islands and the Isle of Man are classed as foreign³⁹. If you are a UK resident, you will normally pay UK tax on foreign income¹, which includes foreign investment income such as dividends and savings interest³⁹. You usually report your foreign income in a Self Assessment tax return³⁹.

Where foreign tax has already been taken from your foreign investment income, relief is available, but it is capped: if the foreign tax you have paid is more than that payable as UK tax, you only get relief up to the amount of UK tax payable, and documentary evidence is required⁴⁰.

Offshore funds raise a further issue for UK investors. Many funds sold to UK investors are domiciled offshore, in Dublin or Luxembourg for example, and their tax treatment depends on whether they have "reporting fund" status. A fund with reporting status allows UK investors to be taxed on gains as capital gains rather than as income, which matters because the Capital Gains Tax rates and the £3,000 allowance are usually more favourable than income treatment. Checking a fund's status is covered in checking whether an offshore fund has reporting status. A quarter of UK adults hold a type of composite investment, the category that includes these packaged funds⁴¹.

People who have recently returned to the UK, or moved abroad, face additional rules. UK residents returning from abroad pay UK tax on their UK income and gains and on any foreign income and gains, although they may not have to if they can claim Foreign Income and Gains relief⁹. The FIG regime, and the qualifying income it covers, including dividends from non-UK resident companies and interest such as on a foreign bank account, is set out in HMRC's helpsheet HS266⁴². The statutory residence test determines residence status in the first place⁴³, and temporary non-residence rules can claw back certain income and gains, including chargeable event gains, offshore income gains and capital gains, when someone returns to the UK⁴³.

Where to get help

Free, impartial help with tax is available. HMRC's guidance on GOV.UK covers the rules and the forms, and HMRC can be contacted about whether income needs to be reported⁴⁴. The personal tax section of this site explains Self Assessment, allowances and the wider tax system in plain terms.

Where a dispute is about an investment rather than the tax, the Financial Ombudsman Service can look at complaints about financial businesses, and its compensation expectations explain what it may tell a firm to pay³². For the tax itself, the helpsheets mentioned above, HS287 for employee share schemes²⁰, HS266 for the FIG regime⁴² and the SA109 notes for non-residents¹⁸, are the documents HMRC expects people to use when completing the relevant pages of a return.

Finally, rates and allowances move. The figures on this page are the ones in force for the tax years covered by the official documents cited, but each Budget can change them, as the recent cuts to the dividend allowance and the annual exempt amount show¹⁶. Before working out a bill, check the current rates and allowances on GOV.UK.