2.4.5 Taxation
Start by looking at the table to see the details of the allowance and tax bands for different forms of investment in 2023/24.
| Allowances and tax bands 2023/24 | Income band | Earnings, pensions and rental income | Interest from savings and bonds | Dividends from shares and bonds |
|---|---|---|---|---|
| Personal allowance | First £12,700 | 0% | 0% | 0% |
| Starting rate band for savings | Next £5000 | 20% | 0% ** | 8.75%* |
| Basic rate tax band | Next £32,700 | 20% | 20% *** | 8.75%* |
| Higher rate tax band | Next £ 74,740 | 40% | 40% *** | 33.75%* |
| Additional rate tax band | Over £125,140 | 45% | 45% *** | 39.35%* |
Footnotes
* These rates only apply to taxable dividend income in excess of £1000. The first £1000 is tax free.Footnotes
** Only applicable to savings income if taxable non-savings income does not exceed £5000.Footnotes
*** These rates apply to taxable savings income in excess of £1000 (basic-rate taxpayers) or £500 (higher-rate taxpayers). The first £1000/£500 of such income is protected by the Personal Savings Allowance (PSA) which makes the income tax-free. Additional rate taxpayers do not qualify for the PSA.Footnotes
Note that slightly different rates apply in Scotland.The taxation of interest from bonds, also known as fixed interest investments (and unit trusts and OEICs that invest mainly in bonds) is very straightforward because it is taxed in the same way as interest from a savings account. However, unlike savings accounts, interest from most bonds is paid out gross (without any tax already deducted).
Gains from investments are subject to Capital Gains Tax (CGT), although there is an annual tax-free allowance (of £6000 in 2023/24). Only gains in excess of this amount are taxed either at 10% for those who are no more than basic rate income taxpayers or 20% for higher or additional rate income taxpayers. If the gain arises from the sale of a property that is not a prime residence the tax rate applied is 18% for those who are no more than basic rate income taxpayers or 28% for higher or additional rate income taxpayers.
The rules on CGT are quite complex. Follow this link to learn more: Capital Gains Tax (CGT) [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)] .
As explained earlier, most of the tax on savings and investments can legally be avoided by investing through ISAs.
So, in summary, there are two main types of tax for UK investors: Income Tax and Capital Gains Tax. Interest from savings and bonds, and dividends from shares, are taxed as income; the profit from selling something for more than it originally cost is typically taxed as a capital gain. Income and gains from some savings and investments are tax-free and, even when they are taxable, the investor may have tax-free allowances to use so that in practice no tax is due.
Tax-efficient investment means choosing tax-free products, using allowances and taking advantage of the difference in tax rates between different types of income and between income and gains – for example, choosing an investment that pays gains rather than income when your gains are protected by being below the capital-gains tax allowance whilst additional investment income would become subject to income tax.