When Do You Pay Taxes on Investments?
Investing is a great way to grow your money, but it’s important to know when you have to pay taxes on your investments. Understanding how taxes work can help you avoid unwanted surprises and make better financial decisions.
This guide will explain the basics of investment taxes, when you need to pay them, and how to manage them to keep more of your money.
What is Capital Gains Tax?
Capital Gains Tax is a tax you pay when you sell certain investments for a profit. This could include selling stocks, property (not your main home), or other valuable items. If you make money above a certain limit, you may have to pay tax on the profit.
Current Capital Gains Tax Allowance:
From April 2025, the annual Capital Gains Tax allowance is reduced to £3,000 per person per year. This applies to all profits made from selling investments over this amount.
How it works:
You only pay tax on the profit you make above your allowance. For the 2025/26 tax year onwards, the Capital Gains Tax allowance has been reduced to £3,000 per person per year. This means if your profit exceeds £3,000, you will need to pay tax on the amount above this threshold.
For example, if you make a £10,000 profit from selling shares, the first £3,000 is tax-free, but you have to pay tax on the remaining £7,000.
Capital Gains Tax Rates:
Basic rate taxpayers: 10% for general assets and 18% for residential property. It's important to note that the Capital Gains Tax rate is higher for property.
Higher rate taxpayers: 20% for general assets and 28% for residential property. Similar to basic rate taxpayers, the Capital Gains Tax rate for property is higher to discourage property speculation and to promote fairness in the tax system. Investors dealing with property should be aware of these differences when calculating their tax obligations.
What’s Exempt?
Investments held in ISAs or pensions are generally exempt from Capital Gains Tax. However, it’s important to understand that while ISAs offer tax-free growth and withdrawals, pensions offer tax-free growth but withdrawals are usually taxed as income when you access your funds after retirement age. This means that the tax benefits differ depending on whether you are investing through an ISA or a pension. Always consider the rules and limits associated with each type of investment account.
Transfers between married couples or civil partners are also free from Capital Gains Tax.
What is Dividend Tax?
Dividend tax is a tax you pay on the income you receive from shares that pay dividends. Dividends are payments made to shareholders when a company makes a profit.
Dividend Allowance (2025/26):
£500 tax-free each year from April 2025.
Dividend Tax Rates:
Basic rate taxpayers: 8.75%
Higher rate taxpayers: 33.75%
Additional rate taxpayers: 39.35%
Dividends earned through ISAs are not taxed.
What is Interest Tax?
Interest tax is paid on the money you earn from savings accounts, bonds, or similar investments. Not all interest is taxed, thanks to a personal savings allowance.
Personal Savings Allowance:
Basic rate taxpayers: £1,000 tax-free.
Higher rate taxpayers: £500 tax-free.
Additional rate taxpayers: No allowance.
How to Reduce Tax on Interest:
Use ISAs - Interest earned in an ISA is tax-free.
Consider premium bonds - winnings from these are tax-free.
Using Tax-Efficient Investment Accounts
Taking advantage of tax-efficient accounts can help you save money and grow your investments without paying unnecessary taxes. There are limits on how much you can invest tax-free each year.
ISAs (Individual Savings Accounts): You can invest up to £20,000 per tax year across all your ISAs (Cash ISAs, Stocks and Shares ISAs, Lifetime ISAs, and Innovative Finance ISAs). Any growth or income earned within an ISA is tax-free, including Capital Gains Tax. This limit is reviewed by the government annually, so always check the latest rules.
Pensions (Self-Invested Personal Pensions - SIPPs): Contributions are tax-free up to the annual allowance, which is currently £60,000 per tax year or 100% of your earnings, whichever is lower. Money grows tax-free within the pension, but withdrawals after the age of 55 (rising to 57 in 2028) may be taxed as income.
Understanding these limits and making the most of them each year can significantly reduce your tax liabilities.
Using tax-efficient accounts can help you reduce how much tax you pay on your investments.
ISAs: No income tax or Capital Gains Tax on investments within an ISA. You can invest up to £20,000 a year tax-free.
Pensions (SIPPs): Contributions are tax-free, and the money grows tax-free. However, you may pay tax when you withdraw it later.
Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs): These are higher-risk investments but offer tax relief to encourage people to invest in smaller companies.
When to Report and Pay Taxes
It’s important to report your taxes correctly and on time to avoid fines.
Self-Assessment Tax Deadlines:
Capital Gains Tax: Report and pay by 31 January following the tax year you sold the investment.
Dividend and Interest Income: Reported on your annual self-assessment tax return.
You can use the UK Government’s Capital Gains Tax calculator to help you estimate what you owe. (https://www.gov.uk/capital-gains-tax)
Strategies to Reduce Investment Taxes
Use Your Allowances: Make the most of your Capital Gains Tax, dividend, and savings allowances every year.
Use ISAs and Pensions: These accounts are designed to help you save and invest tax-free or with tax benefits.
Hold Investments for Longer: The longer you hold your investments, the less likely you are to make quick sales that could result in tax.
Offset Losses Against Gains: If you lose money on one investment, you can use it to reduce the tax you pay on profits from others.
Plan Withdrawals Carefully: Spread out sales of assets to avoid moving into a higher tax bracket.
Final Thoughts
Understanding investment taxes can help you make better decisions about your money. By using tax-efficient accounts and knowing when to report your taxes, you can keep more of your money working for you.
This guide is for informational purposes only and doesn’t provide financial advice. Always talk to a professional if you’re not sure about your taxes or how to invest.
The tax treatment is dependent on individual circumstances and may be subject to change in future.
The value of units can fall as well as rise, and you may not get back all of your original investment.
A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
Your capital may be at risk.
The tax treatment is dependent on individual circumstances and may be subject to change in future. In addition, the availability of tax relief depends on the companies invested in maintaining their qualifying status. Please refer to the HM Revenue & Customs website for further guidance on the tax relief available on EIS / VCT investments.
This type of plan has a complex charging structure.
Tax planning advice is not regulated by the Financial Conduct Authority
Approved by In Partnership FRN: 192638 10/04/2025