Taxes on Your Savings and Investments
Not all investment income is taxed the same way in the UK — understanding the different allowances helps you decide where to hold your savings and investments.
Interest: The Personal Savings Allowance
Basic-rate taxpayers can earn up to £1,000 a year in savings interest tax-free (the Personal Savings Allowance), higher-rate taxpayers up to £500, and additional-rate taxpayers get no allowance at all. Interest earned inside a Cash ISA doesn't count toward this allowance at all — it's simply tax-free, regardless of your tax band.
Dividends and Capital Gains
The Dividend Allowance lets you earn the first £500 of dividend income each year tax-free, with dividends above that taxed at rates depending on your Income Tax band. Capital Gains Tax applies to profits from selling investments above the £3,000 annual exempt amount, currently at 18% or 24% depending on how much of the gain falls within your basic-rate band. Both of these allowances are far smaller than they used to be, which is part of why using an ISA matters more than ever.
The ISA Sidesteps All of This
Everything held inside a Stocks & Shares ISA or Cash ISA — interest, dividends, and capital gains — is completely free of Income Tax and Capital Gains Tax, with no need to even report it on a tax return. Given how narrow the Dividend Allowance and Capital Gains Tax allowance have become, using your £20,000 annual ISA allowance before investing in a General Investment Account is usually the more tax-efficient order.
Frequently Asked Questions
- How much savings interest can I earn tax-free in the UK?
- Up to £1,000 a year for basic-rate taxpayers, £500 for higher-rate taxpayers, and £0 for additional-rate taxpayers (the Personal Savings Allowance) — separate from a Cash ISA, where all interest is tax-free regardless of your tax band.
- How much dividend income is tax-free?
- The first £500 a year (the Dividend Allowance), with dividends above that taxed at rates depending on your Income Tax band.
- What is the Capital Gains Tax allowance?
- The annual exempt amount is £3,000 — gains above that from selling investments outside an ISA are taxed at 18% or 24%, depending on how much of the gain falls within your basic-rate band.
- Do I pay tax on investments held in an ISA?
- No. Interest, dividends, and capital gains inside a Stocks & Shares ISA or Cash ISA are all completely tax-free, up to your £20,000 annual contribution allowance.
Informational content, not financial, tax, or legal advice. Verify amounts, limits, and current conditions directly with official sources (HMRC, FCA, FSCS) before making a decision.
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