Tax on savings and investments Types of saving and investment income

You will have to pay tax on some of your savings income

Your tax will generally be calculated depending on the type of savings or investment you have and what other income you receive. Tax on savings and dividends is often deducted before you receive it.

Tax on savings income is paid at 10%, 20%, 40% or 50% depending on how much other income you have, while tax on dividends is paid at 10%, 32.5% or 42.5%.

Types of savings and investment income

There are three main types of savings and investment income you will pay tax on:

Income from savings

Your savings income is the money you receive in the form of interest – whether taxed or paid gross or tax-free – as opposed to dividends. 

You are likely to accrue this type of interest on:

• Bank or building society accounts (such as savings accounts, current accounts or cash Isas)
• National Savings & Investments products
• Gilts
• Corporate bonds
• Permanent interest-bearing shares (Pibs)
• Local authority investments
• Unit trusts or open-ended investment companies (Oeics) that invest mainly in interest-bearing products

Annuities that you buy voluntarily – as opposed to those you have to buy with the proceeds of a pension fund – also come into this category. However, part of the income you receive is treated as a tax-free return of capital, so not all of your gains are going to be taxed.

Income from dividends

The second type of income on which you will be taxed is dividend income. This comes from:

• Shares you own in companies
• Investment trusts
• Unit trusts and Oeics that invest mainly in shares

Income from life insurance investments

The third type of investment income you might receive is income from life insurance investments, such as with-profit and investment bonds. 

Tax on savings is often deducted before you see it

Taxed, taxable and tax-free

There are three main ways that income from savings and investments is taxed:

Tax-free 

The income you receive doesn’t attract tax and you don’t have to declare it

Taxable, and paid net of tax 

With this income some tax has already been deducted, enough to cover a basic-rate taxpayer’s liability. However, if you are a higher-rate taxpayer you will still have some tax to pay. 

Interest from bank and building society accounts and dividends from shares or unit trusts all fall into this category. 

We refer to this type of savings and investment income as ‘taxed'. 

With savings income, non-taxpayers can reclaim tax deducted or arrange gross payments, and starting rate tax-payers can reclaim some.

Taxable, but paid gross

This income is taxable, but tax isn’t deducted before you receive it, so you are responsible for paying all the tax due on this type of income. Income from some National Savings & Investments accounts and gilts fall into this category.

For comprehensive, expert guidance on saving and investing, including information on how you are taxed, tax efficient wrappers and how to work the tax system using ISAs, SIPPs and CTFs, buy Save and Invest by Jonquil Lowe.

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For more on savings and investments, also see our book Save and Invest.