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Income tax on savings and investments

Types of saving and investment income

By Ian Robinson

Article 1 of 4

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Types of saving and investment income

Get the facts about the main types of savings and investment income you may have to pay tax on.

When you make money from your savings or investments, your tax bill will generally be calculated depending on the type of products you hold and what other income you receive. 

And you'll only start paying tax once your income exceeds your personal allowance, the personal savings allowance or the dividend allowance. 

Tax on savings income is paid at 20%, 40% or 45% in 2016-17 and 2017-18, depending how much other income you have, while tax on dividends from investments is paid at 7.5%, 32.5% or 38.1%.

Basic-rate taxpayers will not pay income tax on the first £1,000 savings interest they receive. Higher-rate taxpayers have a £500 tax-free allowance. This is on top of any unused personal allowance. 

  • Get a head start on your 2016-17 tax return with the Which? tax calculator. Tot up your tax bill, get tips on where to save and submit your return direct to HMRC with Which?.

Types of savings and investment income

There are three main types of savings and investment income on which you may have to pay tax:

Income from savings

Savings income is the money you receive in the form of interest – as opposed to dividends. 

You are likely to accrue this type of interest on:

  • bank or building society accounts
  • National Savings & Investments (NS&I) 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 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 taxable.

Income from dividends

The second type of income on which you may 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.

  • Last updated: November 2017
  • Updated by: Tom Wilson
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