Tax on Investments & Savings: UK Tax Guide | Lightyear (2024)

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As soon as you start planning for the future and building a nest egg, you’ll need to make sure you understand the UK’s tax on investments and tax on savings. You may find you need to report or pay tax on interest from savings, and dividends paid by investments - or you may need to pay capital gains tax when you sell assets. This UK tax guide walks through some of the most important things to consider when it comes to tax on investments and savings - and also touches on how you may be able to grow your assets with less exposure to tax, using a UK ISA.

Already got an ISA? Check out our ISA savings and tax calculator, to model different possible outcomes to your income, including how much you can save on tax, and how your ISA may grow over time.

If you have money saved in the UK, and earn interest on your deposit, you may need to pay taxes, depending on the amount of interest you earn and any other income you have.

Essentially, interest is just another sort of income - like getting a salary from your employer. But as interest is paid gross, without tax being deducted at source, you may need to make a few arrangements to pay any tax on savings that’s owed, unlike if you pay PAYE tax on your salary. This UK tax guide gives you some helpful pointers.

Let’s start at the beginning. When it comes to tax on savings in the UK, what types of savings are counted?

You may need to declare and pay tax on the following:

Most people can earn some interest before any tax is required. It’s also helpful to note that any relevant tax is declared and becomes payable in the following tax year. So interest paid to you in tax year 2024/2025 would typically be declared and be liable for tax in 2025/2026. Interest on joint accounts is usually split 50/50 for tax purposes.

The requirements, amount of tax, and process for paying can vary a lot based on your personal circ*mstances. If you’re ever unsure, do get some tax advice from a professional who will be able to brief you on your obligations.

How much UK tax you’ll pay on savings interest can vary depending on your personal income tax bracket among other things. You can calculate your income tax bracket and your tax free personal allowance⁵ from the government website. These brackets are reviewed from time to time - for this guide we've taken the live details for the 24/25 tax year.

You’ll start to pay tax on interest from your savings once you’ve exhausted all your relevant tax free allowances. The allowances which may apply are;

The basic tax free personal allowance is £12,570 (GBP) annually. If you earn less than this from other sources, any interest you’ve earned will count towards your personal allowance before any of it is taxed.

The starting rate for savings is £5,000, meaning that you can earn an additional £5,000 in interest without paying tax if you’re entitled to this full allowance. This rate is reduced on a sliding scale if you earn over £12,570 annually. The allowance is reduced by £1 for every pound earned over the tax free personal allowance - meaning that if you earn £17,570 or above, this allowance will no longer apply.

Finally, your personal savings allowance if you pay tax on your income at the basic rate is £1,000 - reduced to £500 for higher rate taxpayers. There’s no tax-free allowance for savings interest if you earn over £125,140 a year - you’ll pay tax on everything earned.

Want to reduce your exposure to tax on savings? We’ll cover how you can efficiently save and grow your investments using a UK ISA, a little later.

Tax - as we've already stated - can be pretty complicated. It’s important to take personal advice to learn more about your own obligations - but to illustrate UK tax on savings interest, let’s take 3 examples.

Example 1: Claire earns £10,000 a year. This is under the tax free personal allowance. This means that Claire can earn the remainder of the tax free personal allowance + the starting rate for savings + her full personal savings allowance in interest before paying tax. She can earn £8,570 in interest before any tax is payable.

Example 2: Dan earns £15,000 a year. This is above the tax free personal allowance, so the starting rate for savings is reduced by 1 GBP for every pound over the 12,570 GBP limit. This leaves Dan with a starting rate for savings at £2,570. Dan can still get his full personal savings allowance in interest before paying tax, making a total of £3,570 before paying tax on interest from savings.

Example 3: Lucy earns £45,000 a year. Her income exceeds the tax free personal allowance and reduces the starting rate for savings allowance to zero. She does still get a personal savings allowance of £1,000. She will pay tax on any interest earned above the £1,000 tax-free allowance.

Looking for more? The Government backed Money Helper website also has a wealth of easy to read information about tax on savings and interest - as well as plenty more useful content to help you manage your money, for now and for the future.

If you hold UK investments - stocks and shares for example - you may need to pay tax on dividends you earn. When you sell investments there may also be tax to pay, in the form of capital gains tax (CGT).

In some cases, various taxes apply when you buy assets as well - ask your broker if you’re not sure whether any extra costs may apply when buying shares or investing in other similar assets. If you use Lightyear, we have information on taxes and statements here.

If you earn dividends from shares you own, you may pay tax on dividends that these shares pay you. As with savings interest, if you hold your investments in eligible ISAs, you may be able to reduce the amount of tax you pay overall - we’ll touch on that in more detail later.

You’ll start to pay tax on dividends from investments once you’ve exhausted all your relevant tax free allowances. The allowances which may apply are;

The basic tax free personal allowance is £12,570 annually. In the 2024/25 tax year, the dividend allowance is £500. If your income from salary exceeds £12,570, you will not need to pay tax on the first £500 of dividends earned in the 2024/25 tax year. If you earn under £12,570 in other sources of income, you won’t pay tax on any dividend which falls within the combined total of your tax free personal allowance + your dividend allowance.

The amount of tax you may pay on dividends depends on your normal rate of income tax, as follows:

You may need to pay capital gains tax (CGT) if you sell assets which have increased in value since you bought them - such as shares, units in a unit trust, and some bonds.

To see if you need to pay CGT you have to work out the gains you’ve made, and deduct eligible costs. This can be a fairly complex calculation in some situations, such as if you bought shares in the same company on a regular basis over a period of time.

You’ll be able to make a gain of £3,000 in the 2024/25 tax year before any CGT needs to be paid. If you earn more than this, you’ll usually need to pay CGT at 10% as a basic rate taxpayer, and 20% if you’re a higher rate taxpayer.

There’s a handy government capital gains tax calculator which can help you work out if you may owe anything - but getting personal advice from a tax accountant is also often a smart plan.

If you owe up to £10,000 in taxes on savings and investments, HMRC can change your tax code to recoup the money, as long as you’re employed or receive a pension in the UK.

If you need to pay tax on up to £10,000 in dividends, you can do so either by having HMRC adjust your tax code to claim back the money, or by completing a tax self assessment.

If you earn more than £10,000 in savings interest and dividends combined, you must complete a tax self assessment, and will be informed of what you owe.

In the UK you can open an Individual Savings Accounts (ISAs) as a way to reduce the amount of tax you may pay on interest from savings and dividends from investments.

An ISA is a tax wrapper which stops you from needing to pay taxes on some or all of your investment, subject to meeting government conditions.

You can choose between 4 different types of ISA:

You can pay into an ISA or ISAs up to your annual allowance every UK tax year, as long as you’re eligible. This allowance changes from time to time, but is £20,000 in total in 2024.

You do not need to declare or pay taxes on funds held in an eligible ISA - which can mean this is a very efficient way to save, and can cut your UK tax bill overall.

If you’re interested in how much you could earn in interest, or save on tax, by using an ISA, check out our ISA savings and tax calculator. All you’ll need to do is to enter a few details about how you save or plan to save, to model different possible outcomes to your income over time. This can help you plan our investing strategy to make sure your money is working well for you.