Unlike your salary, investment income isn’t taxed in one consistent way. Interest, dividends, capital gains and rental income are all treated differently – with different allowances, different rates, and different rules depending on how much other income you have. This is where our Tax Planning service starts: here’s how it actually breaks down for the current tax year, and what you can do to keep more of it.
Why investment tax feels more complicated than it should
Investment income doesn’t attract National Insurance, so historically it’s been taxed more lightly than earnings from work. To manage that, successive governments have layered separate allowances and rates onto different types of investment income – which is why interest, dividends and gains each have their own rules rather than one simple system.
Interest income
Interest from savings accounts, gilts and most bonds is taxed as income, but the Personal Savings Allowance (PSA) shelters some of it: £1,000 tax-free for basic rate taxpayers, £500 for higher rate, and nothing for additional rate taxpayers. Interest is treated as the “middle slice” of your income for tax purposes, sitting above earnings but below dividends. From 6 April 2027, the tax rates on savings interest are set to rise by 2 percentage points, to 22% (basic rate), 42% (higher rate) and 47% (additional rate).
Dividend income
Dividends have their own allowance and their own, separate rates – for 2026/27, the first £500 of dividend income is tax-free, with tax above that charged at 10.75% (basic rate), 35.75% (higher rate) and 39.35% (additional rate). Dividends are treated as the “top slice” of income, so they’re taxed at whatever rate applies once your other income has used up the lower bands.
Capital Gains Tax
When you sell an investment for more than you paid for it, the profit (the “gain”) can be subject to Capital Gains Tax. For 2026/27, the annual exempt amount is £3,000 – gains above that are taxed at 18% within the basic rate band, or 24% above it. Losses can usually be offset against gains, and unused losses can often be carried forward, so keeping records matters.
Property income
Rental income is taxed at your normal income tax rates, with no separate allowance beyond the £1,000 property allowance available to smaller landlords. Mortgage interest relief for individual landlords is now given only as a basic rate tax credit rather than a full deduction, which has significantly increased the effective tax rate for many higher-rate taxpayers with buy-to-let property. From 6 April 2027, property income for taxpayers in England, Wales and Northern Ireland will be taxed at separate rates of 22%, 42% and 47%. Different rates apply to Scottish taxpayers.
Investment bonds
Investment bonds work differently again: you can usually withdraw up to 5% of the amount invested each year without an immediate tax charge, for up to 20 years. Where a gain arises, top-slicing relief may reduce the tax payable by calculating the effect of the gain as though it had arisen evenly over the number of years the bond was held. This is a genuinely useful but often overlooked planning tool.
Making the most of tax-efficient wrappers
The simplest way to reduce investment tax isn’t chasing lower rates – it’s using the wrappers designed to shelter income and gains in the first place, which is a core part of how our Asset Management team structures portfolios:
- ISAs – up to £20,000 a year, with all growth, income and gains completely free of UK tax. (From April 2027, the government has confirmed that under-65s will only be able to pay up to £12,000 a year into cash ISAs, with the full £20,000 still available across stocks & shares ISAs. Over-65s can continue to put the full £20,000 into cash.)
- Pensions – tax relief on the way in, tax-free growth, and normally 25% tax-free on the way out.
- Junior ISAs – a tax-free way to invest on behalf of children.
- Spreading investments between spouses or civil partners, where each person has their own set of allowances to use.
Frequently Asked Questions
Do I pay tax on money inside an ISA?
No – income and gains inside an ISA are completely free of UK tax, however much the investments grow.
What’s the dividend allowance for 2026/27?
The first £500 of dividend income is tax-free, whichever tax band you’re in. Above that, dividends are taxed at 10.75%, 35.75% or 39.35% depending on your income tax band.
How is Capital Gains Tax calculated?
You take the sale proceeds, deduct what you originally paid (plus allowable costs), and the result is your gain. The first £3,000 of gains each year is tax-free; above that, gains are taxed at 18% or 24% depending on your income tax band.
What is top-slicing relief?
Top-slicing relief may reduce the tax payable on an investment bond gain by calculating the effect of the gain as though it had arisen evenly over the number of years the bond was held.
Make Your Investments Work Harder, Tax-Efficiently
Investment tax rules change most years, and the right structure for your portfolio depends on your full financial picture – not just the headline rates. Speak with OCM, as part of our wider Wealth Management service, to make sure your investments are working as tax-efficiently as possible.
