Concerned about taxes eating into your profits? We outline the amount you will pay and examine strategies to keep more of your investment gains
Investment profits have been scrutinized by successive governments in an effort to increase revenue, and they are now more likely to be taxed than they were not too long ago.
In recent years, the tax rates on dividends and capital gains tax (CGT) allowances have increased and they have been drastically reduced, making it harder for investors to afford assets that perform well.
We have paid 808 million in capital gains tax in the final three months of 2024 alone. Comparing this period to the same period last year, it is up 46%.
Two of the best ways to avoid paying taxes on your investments are to invest in ISAs and pensions. The funds in a pension grow tax-free and are only liable to income tax upon withdrawal. Gains or withdrawals from investments made through ISAs are tax-free.
According to a Hargreaves Lansdown analysis of HMRC data, ISAs were expected to save us 9 billion pounds in 2024 - 2025 in income tax and capital gains tax.
It's worth considering how to use the ISA allowance to retain more of your investment gains, as it will be reset to 20,000 for the upcoming tax year.
However, it's also critical to ensure that you're utilizing all additional tax-free benefits accessible to investors in the UK. This guide explains each one and how much you will owe in taxes when it becomes inevitable to pay taxes on investment profits.
What is the dividend tax?
If you receive dividends from company shares that you own (if you own them outside of an ISA), you are required to pay dividend tax. If you work for yourself through your own limited company and receive dividends from it, you would also be responsible for paying dividend tax.
The income tax band you are in determines how much of your dividends are taxed. Total dividend income is added to other income to determine your tax band.
Dividends are subject to 8 percent taxation for taxpayers with basic rates. It is 33.75 percent for taxpayers with higher rates. Taxpayers who pay additional rates pay 39.35 percent.
Dividends are taxed after all other income. Therefore, you could pay taxes at multiple rates.
If your income is within your personal allowance (the total amount of money you can earn annually without paying taxes), you are not required to pay dividend tax. At the moment, the personal allowance is £12,570. However, your salary or pension income will most likely be depleted.
Tax deduction for dividends.
Every year, you also receive a dividend allowance. Only dividend income over the dividend allowance is subject to taxation. The allowance was reduced significantly in the last few years, from 5,000 in 201718 to only 500 in 2025 - 2026.
According to Camilla Esmund, senior manager at Interactive Investor, "Even small portfolios may incur needless tax bills given the dividend allowance of £500. Holding dividend-paying assets inside ISAs or SIPPs, where returns can grow tax-free, can help keep things straightforward and stress-free.
Can you explain what capital gains tax is?
When you sell (or otherwise dispose of) an asset and make a profit, you are required to pay capital gains tax (CGT), according to HMRC.
If you sell what are known as chargeable assets and you make a profit, you must pay CGT. These consist of:
Most personal belongings valued at 6,000 or more, excluding your car property, which is not your primary residence if you have rented it out, used it for business purposes, or it is very large, any shares that are not in an ISA, or PEP business assets You may also be required to pay CGT if you auction off cryptocurrency, such as Bitcoin.
If you and another person jointly own an asset, you will be required to pay capital gains tax (CGT) on your portion of the gain.
Your income tax band determines how much CGT you pay.
Gains from residential property, excluding the primary residence and other chargeable assets, are subject to an 18% tax for basic rate taxpayers as of April 6, 2025. It is 24% for taxpayers with higher rates and additional rates.
Regardless of your income tax band, you will also be subject to a 32 percent rate on gains from carried interest if you manage an investment fund.
The CGT rate that applies to investors' relief and business asset disposal relief when shares of a trading company that is not listed on a stock exchange are sold was raised from 10% to 14% as of April 6, 2025. This is scheduled to rise to 18 percent on April 6, 2026.
Allowance for capital gains tax.
Only the total gains over your tax-free allowance, also referred to as the annual exempt amount, are subject to CGT. In the last few years, this has been drastically reduced. The CGT tax-free allowance for 2025 - 2026 is £3,000.
"Any gains realized above the 3,000 limit are taxable," says Camilla Esmund, senior manager at Interactive Investor. Investing in pensions or ISAs, which protect your profits from CGT, can lessen the impact.
Using more than one 3,000 allowance may also be worthwhile if investment sales are spread out over several tax years. You can maintain your lower tax bracket by using this strategy.
You may be able to claim what is known as a relief, which lowers any tax you pay, depending on the asset.
How does interest income tax operate?
You might be required to pay taxes on the interest you receive if you invest in bonds, open-ended investment companies, unit trusts, investment trusts, or peer-to-peer lending. This is also true if you have money in a savings account or bank account that is generating interest.
Similar to income tax on earnings, interest is taxed at a rate of 20% for basic rate taxpayers, 40% for higher rate taxpayers, and 45% for additional.
Most people can earn interest on their investments and savings without paying taxes thanks to annual allowances. The personal savings allowance, the starting rate for savings, and the personal allowance are the three allowances that are relevant.
Your personal allowance, which is the total amount of money you can receive in 2025 - 2026 without having to pay income tax, is £12,570. For example, you can use this to pay your interest income if you haven't used it up on your salary or pension income.
Up to £5,000 in interest per year is available to you tax-free with the savings starting rate. However, this allowance declines as your other income increases; for every dollar you receive over your personal allowance, your initial savings rate is reduced by one. You do not receive the starting rate for savings at all if your other income is £17,570 or more.
Finally, basic rate taxpayers can earn £1,000 in interest without paying taxes thanks to the personal savings allowance, while higher rate taxpayers can earn £500. Additional rate taxpayers are not eligible for a personal savings allowance.
According to Shawbrook's 2024 study, 44% of savers claim they don't understand their personal savings allowance.
The number of people who are unintentionally leaving their wallets open for the tax collector is astounding, according to Adam Thrower, head of savings at Shawbrook. Hundreds of thousands of savers are still ignorant that they must pay taxes on the interest they earn. As a result, their pockets will not be as full as they had hoped.
"People should examine their interest rate and the amount of interest they owe this year, and they should think about using their ISA allowances to earn interest that is tax-free.
Stamp duty as well as the Stamp Duty Reserve Tax (SDRT).
Individual shares of a UK-incorporated company are typically subject to a 0.5 percent tax or duty at the time of purchase.
You will have to pay stamp duty reserve tax (SDRT) if you purchase the shares online. In a similar vein, if you purchase shares using a stock transfer form and the transaction value exceeds 1,000, you will be required to pay stamp duty.
If you receive shares in a company for free or subscribe for a new issue of shares, you are exempt from paying taxes.
Additionally, if you purchase units in a unit trust or shares in an open ended investment company (OEIC) from the fund manager, there is no tax due.
Income tax on real estate.
Rental property income is subject to the same income tax rate as regular income, which is 20% for taxpayers with basic rates, 40% for those with higher rates, and 45% for those with additional rates.
Nonetheless, the first £1,000 of your rental income is exempt from taxes. This is your allowance for property.
Any buy-to-let (BTL) rental income that exceeds 2,500 after allowable expenses or 10,000 before allowable expenses must be reported to HMRC on a self-assessment tax return.
Allowable expenses include ground rent, services fees, letting agent fees, and any other costs you incur in the course of managing the property.
Although it is no longer as generous as it once was, landlords can still take advantage of a 20 percent tax credit on their buy-to-let mortgage interest payments.
The rental income is counted and taxed in the same manner as any other business income if the rental property is owned under a limited company structure.
Budgeting and financial planning are crucial before beginning BTL investing, according to Holly Tomlinson, a financial planner at Quilter.
In addition to your deposit, you also need to account for upfront expenses like legal fees, stamp duty, property surveys, and possible remodeling costs. Maintenance, insurance, property management fees if you work with an agent, and the cost of potential vacant periods are examples of ongoing expenses.
Additionally, there are tax ramifications, such as capital gains tax upon property sales and income tax on rental income. Profitability may also be impacted by recent adjustments to mortgage interest tax relief.
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