How Much is Tax on Investment Income? (2026/27 UK Guide)

When calculating a client’s tax exposure on their investment portfolio, you must categorise the returns into specific income streams (dividends, savings interest, property yield, and capital gains) and apply the strict ordering rules. For the 2026/27 tax year, the government has frozen core allowances while aggressively increasing the statutory rates applied to dividend income. You must also prepare clients for further legislated rate hikes affecting property and savings income scheduled for 2027/28.

This guide outlines the precise statutory thresholds, calculation mechanics, and tax rates for investment income in the UK.

The Base Layer: The Personal Allowance

Before calculating tax on specific investment wrappers, you must establish the client’s baseline tax-free capacity. For the 2026/27 tax year, the standard Personal Allowance remains frozen at £12,570.  Taxpayers can utilise this allowance against any form of taxable income, including investments, provided their total adjusted net income does not breach the £100,000 taper threshold.

The higher rate threshold (the point at which taxpayers begin paying the 40% higher rate on non-savings and non-dividend income) also remains frozen at £50,270 for the 2026/27 tax year.

Dividend Income: The £500 Allowance and 2026/27 Rate Hikes

When clients extract profits via corporate dividends or receive distributions from equity portfolios, they benefit from a specific dividend allowance. For the 2026/27 tax year, the dividend nil rate (the “Dividend Allowance”) sits at a strict limit of £500.

If the client’s dividend income exceeds this £500 threshold, they face significantly higher tax rates than in previous years. Section 4 of the Finance Act 2026 formally increased the statutory rates for dividend income:

(1)In section 8 of ITA 2007 (which provides, among other things, for the dividend ordinary rate and dividend upper rate)— (a)in subsection (1) (the dividend ordinary rate), for “8.75%” substitute “10.75%”, and (b)in subsection (2) (the dividend upper rate), for “33.75%” substitute “35.75%”. (2)The amendments made by this section have effect for the tax year 2026-27 and subsequent tax years.

Consequently, for 2026/27, dividends in excess of the £500 allowance are taxed at:

• 10.75% (Dividend ordinary rate for basic rate taxpayers).
• 35.75% (Dividend upper rate for higher rate taxpayers).
• 39.35% (Dividend additional rate for additional rate taxpayers).

Arithmetic Example: A basic rate taxpayer receives £2,000 in dividends during 2026/27.

1. The first £500 is covered by the Dividend Allowance (taxed at 0%).
2. The remaining £1,500 is taxed at the new ordinary rate of 10.75%.
3. Total tax due = £1,500 × 10.75% = £161.25.

Savings Interest (Cash Investments): Starting Rates and Allowances

Interest generated from cash savings, corporate bonds, and certain government gilts is classified as “savings income”. For 2026/27, the main savings rates align with standard income tax rates at 20% (basic), 40% (higher), and 45% (additional).

However, clients can heavily mitigate this tax using two statutory allowances:

1. The Starting Rate for Savings

Section 12A of the Income Tax Act 2007 (ITA 2007) provides a £5,000 “starting rate for savings” which taxes savings income at a 0% rate.  Crucially, this is only available if the individual’s non-savings income (such as salary or pension) is extremely low. If their non-savings income exceeds their Personal Allowance (£12,570) plus the £5,000 starting rate limit (totalling £17,570), they lose access to this 0% band entirely.

2. The Personal Savings Allowance (PSA)

Section 12B of ITA 2007 grants a secondary nil-rate band specifically for savings income:

• Basic rate taxpayers: Receive a £1,000 PSA.
• Higher rate taxpayers: Receive a reduced £500 PSA.
• Additional rate taxpayers: Receive £0 (the allowance is withdrawn entirely).

Legislative Warning for 2027/28: While savings income remains taxed at 20%, 40%, and 45% for 2026/27, section 5 of the Finance Act 2026 dictates that from 6 April 2027, the savings rates will increase to 22% (basic), 42% (higher), and 47% (additional).

Property Income: Imminent 2027/28 Hikes

For clients generating yield from buy-to-let properties or Real Estate Investment Trusts (REITs), property income is currently taxed at the main income tax rates for the 2026/27 tax year: 20% (basic), 40% (higher), and 45% (additional).

However, you must prepare clients for sweeping changes to property taxation. From 6 April 2027, the government will detach property income from the main rates. The new rates for the 2027/28 tax year will be:

• Property basic rate: 22%.
• Property higher rate: 42%.
• Property additional rate: 47%.

Furthermore, from April 2027, the rules governing the calculation of Income Tax will change so that general reliefs and allowances (like the Personal Allowance) can only be applied to property, savings, and dividend income after they have been exhausted against other sources of earned income.

Capital Gains Tax: 2026/27 Rates on Investment Growth

When a client disposes of an investment asset (such as shares or funds outside an ISA), they realise a capital gain rather than income.

For the 2026/27 tax year, the Capital Gains Tax (CGT) Annual Exempt Amount (AEA) is strictly capped at £3,000 for individuals.  If net gains exceed this threshold, the following CGT rates apply to non-residential assets:

• Basic rate taxpayers: 18%.
• Higher and additional rate taxpayers: 24%.

Tax-exempt wrappers remain vital. A client can still shelter up to £20,000 of capital per year inside an Individual Savings Account (ISA), ensuring all subsequent dividends, interest, and capital gains generated within the wrapper remain entirely free of UK tax.  Similarly, investments held within a registered pension scheme are exempt from UK tax on investment income and capital gains.

Summary Table: 2026/27 Investment Tax Rates

Next steps for advisors: Review your clients’ asset allocations to maximise the use of the £20,000 ISA allowance and the £500 Dividend Allowance before 5 April 2027, and calculate the projected cash-flow impact of the incoming 22% / 42% / 47% rates on their property and savings yields for the 2027/28 tax year.