How savings interest, dividends and investment gains are taxed
Interest, dividends and gains are each taxed under different rules with their own allowances. Holding the same investments in the right account, or in the right name, can change the tax on them considerably.
By Andy Jackson, Head of Accountancy
Updated 26 October 2026
5 min read
Key takeaways
- Interest is covered first by the Personal Savings Allowance: £1,000 for basic-rate taxpayers, £500 for higher-rate and nothing for additional-rate.
- The first £500 of dividends is tax-free. Dividends above that are taxed at the dividend rates for your band.
- Gains are subject to capital gains tax above the £3,000 annual exempt amount.
- Investments held in an ISA or a pension are outside income tax and capital gains tax.
Savings interest
Banks and building societies pay interest without deducting tax. HMRC collects any tax due through your tax code or your self assessment return. Three allowances can apply, in this order:
- Personal allowance. Any part of your £12,570 personal allowance not used by earnings or pensions covers interest first.
- Starting rate for savings. Up to £5,000 of interest can be taxed at 0%. This band shrinks by £1 for every £1 of other income above your personal allowance, so it mainly helps people with low earnings.
- Personal Savings Allowance. £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers and nothing for additional-rate taxpayers.
With higher interest rates, a few hundred thousand pounds on deposit can use up these allowances quickly. Interest on fixed-term accounts is usually taxed in the year it is paid or credited, which can push income into a higher band in the year a bond matures.
Dividends
Everyone has a £500 dividend allowance. Dividends above it are taxed at the dividend rate for the band they fall into. For 2026/27 those rates are 10.75% for basic-rate taxpayers, 35.75% for higher-rate and 39.35% for additional-rate. Dividends are treated as the top slice of your income, after earnings and interest, so a large dividend is the income most likely to be taxed at the higher or additional rate.
Investment funds that reinvest income, known as accumulation units, are still taxed on that income each year even though you receive no cash. Platform tax packs show the figures to include on your return.
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Gains on investments
When you sell shares or funds for more than you paid, the gain is subject to capital gains tax. The first £3,000 of gains each tax year is exempt. Gains above that are taxed at 18% where they fall within your basic-rate band and 24% above it.
Losses can be set against gains of the same year and carried forward, provided you report them to HMRC within four years of the end of the tax year in which they arose.
ISAs and pensions
Interest, dividends and gains inside an ISA are free of income tax and capital gains tax, and do not need to go on a tax return. You can put up to £20,000 a year into ISAs. From 6 April 2027, people under 65 can put no more than £12,000 of that into cash ISAs, and interest on uninvested cash held in a stocks and shares ISA will be taxed at 22%. Moving existing investments into an ISA, often called "bed and ISA", means selling them and buying them back inside the ISA, which can create a gain to report.
Pension investments also grow free of income tax and capital gains tax. Money is locked away until pension age and withdrawals are taxed as income, apart from the tax-free portion. Our guide on ISAs and pensions compares the two.
Couples and ownership
Married couples and civil partners who live together can transfer savings and investments between them without capital gains tax. Moving assets to the partner who pays tax at a lower rate, or who has unused allowances, can reduce the household's tax. The transfer must be a genuine outright gift: the income belongs to the person who owns the asset.
Unmarried couples do not have this exemption, so a transfer between them is treated as a sale at market value.
Who owns each investment also affects your will, inheritance tax and how quickly money can be reached after a death. We look at the tax and the estate plan together.
Frequently asked questions
Is bank interest taxed?
Yes, but much of it is covered by the personal allowance, the starting rate for savings or the Personal Savings Allowance. In 2026/27, interest above those allowances is taxed at your normal income tax rate. From 6 April 2027 savings income has its own rates of 22%, 42% and 47%.
How much can I earn in dividends tax-free?
The dividend allowance is £500 a year. Dividends inside an ISA or pension are tax-free in addition to this.
Do I pay tax on accumulation units?
Yes. Income that is reinvested inside a fund is still taxable each year, even though you do not receive it as cash.
Can I move investments to my spouse to save tax?
Yes, if you live together. Transfers between spouses and civil partners are then free of capital gains tax, and the income is taxed on the new owner. The gift must be outright.
Sources & further reading
This article is general information, not advice. Tax, financial and legal rules change and their effect depends on your circumstances. Check the current position and take professional advice before acting. Last reviewed 26 October 2026. Totus One Limited (company no. 16855798).
Founder of Buzz Accounting, Practice Group and Founder Capital, Andy has built businesses across accountancy, fintech, private equity and e-commerce. He brings the discipline of a COO, the mindset of a founder and the connections of an investor — and a conviction that most businesses aren't broken, they're just leaking time and money.
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