Investments held outside an ISA or pension can be taxed twice over: once on the income they pay out, and again on the profit when they are sold. This article sets out how both taxes work for the 2026 to 2027 tax year, using the figures published by GOV.UK.
Two different taxes on the same holding
Tax on investments is not one charge. It splits into two, and each has its own allowance, its own rates and its own trigger.
- Dividend tax applies to income paid out by shares, and by funds that hold them, when that income is received.
- Capital Gains Tax (CGT) applies to the profit made when an investment is sold for more than it cost.
A holding that pays no dividends can still produce a CGT bill. A holding that is never sold can still produce a dividend tax bill. Keeping the two apart is the first step to understanding what a portfolio really keeps after tax.
How does dividend tax work in 2026 to 2027?
According to GOV.UK, for the tax year from 6 April 2026 to 5 April 2027 there is a dividend allowance of £500 a year. Dividend income above that allowance is taxed at rates that depend on the Income Tax band it falls into:
| Income Tax band | Dividend tax rate |
|---|---|
| Basic rate | 10.75% |
| Higher rate | 35.75% |
| Additional rate | 39.35% |
The band is worked out by adding dividend income to other income. GOV.UK describes this directly: add total dividend income to other income to establish the tax band. Dividends therefore sit on top of salary, which is why the same dividend can be taxed lightly for one person and heavily for another.
For context, GOV.UK gives the 2026 to 2027 Personal Allowance for England as £12,570, with the basic rate band running from £12,571 to £50,270, the higher rate band from £50,271 to £125,140, and the additional rate above £125,140. Those bands are the England figures, so readers elsewhere in the UK should check the position for their own nation.
A worked example for dividends
The figures below are illustrative arithmetic only. Suppose an investor receives £2,000 of dividends from holdings outside an ISA.
- The first £500 is covered by the allowance, leaving £1,500 to tax.
- If the dividends fall in the basic rate band: £1,500 × 10.75% = £161.25.
- If the dividends fall in the higher rate band: £1,500 × 35.75% = £536.25.
The same £2,000 of dividends therefore costs £161.25 or £536.25 depending on the band, a difference of £375.
How does Capital Gains Tax work on shares and funds?
CGT is due on the gain, not on the amount sold. GOV.UK says tax may be due when a profit is made selling shares that are not in an ISA or PEP, and units in a unit trust. The steps for working out whether tax is owed are to calculate the gain on each asset, add the gains together, and then deduct any allowable losses.
Only the total above the annual exempt amount is taxed. For 2026 to 2027, GOV.UK gives that amount as £3,000.
The rates, which GOV.UK says apply from 6 April 2026 to shares and other assets other than residential property, are:
| Taxpayer | Rate on gains |
|---|---|
| Basic rate | 18% on gains within the basic Income Tax band; 24% on gains above it |
| Higher rate | 24% on all gains |
For a basic rate taxpayer, the rate therefore depends on the size of the gain and on taxable income, because a large enough gain can push part of it above the basic rate band.
A worked example for gains
Again, the arithmetic is illustrative. Suppose a higher rate taxpayer sells shares and realises total gains of £8,000 in the tax year, with no losses.
- Gains above the exempt amount: £8,000 − £3,000 = £5,000.
- CGT at 24%: £5,000 × 24% = £1,200.
If the same investor had also realised a £2,000 loss in that year, the net gain would fall to £6,000, the taxable amount to £3,000, and the tax to £720 (£3,000 × 24%).
Why do losses matter?
GOV.UK states that allowable losses are deducted from total gains when working out what is taxable. This is why a portfolio’s tax bill is not simply a function of its winners. A loss on one holding can reduce the tax due on a gain on another within the same calculation.
Losses are not a reason to hold a poor investment, nor a reason to sell a good one. They are a feature of how the tax is calculated, and investors who keep clear records of purchase costs and sale proceeds find the calculation far easier.
The reporting threshold that catches people out
A gain below the annual exempt amount can still need reporting. GOV.UK says that for those who file a Self Assessment return, gains must be reported even when below the allowance if the total sale proceeds were more than £50,000, a threshold that applies for the 2023 to 2024 tax year onwards.
The point is easy to miss because the test is about what the assets sold for, not the profit. Selling £60,000 of shares at a gain of £500 would still meet the reporting condition described on the page, even though no tax would be due.
What an ISA changes
GOV.UK states that you do not pay tax on income or capital gains from investments held in an ISA. In a stocks and shares ISA, dividends and growth are therefore free of both taxes discussed above. For 2026 to 2027, the total ISA limit across all ISA types is £20,000, according to GOV.UK.
Two practical details follow from the official guidance:
- The limit is shared. There is no separate allowance for stocks and shares ISAs; it is one £20,000 total across all ISA types.
- Moving existing holdings in is restricted. GOV.UK says you cannot transfer non-ISA shares you already own into an ISA unless they come from an employee share scheme. In practice, that means selling and then rebuying within the ISA, and the sale may itself create a gain to assess.
GOV.UK also lists UK government gilts among the assets on which no CGT is charged. Readers interested in how those yields behave can read why gilt yields matter to everyday borrowers.
Comparing the three outcomes side by side
The table below applies the 2026 to 2027 figures to a single illustrative investor in the higher rate band, with £2,000 of dividends and £8,000 of realised gains in the year.
| Where the holdings sit | Dividend tax | CGT | Total |
|---|---|---|---|
| Outside an ISA | £536.25 | £1,200 | £1,736.25 |
| Inside a stocks and shares ISA | £0 | £0 | £0 |
The arithmetic is straightforward: £536.25 + £1,200 = £1,736.25. The example ignores charges and assumes the investor’s other income is unchanged. It is not a prediction of returns, and an investor in the basic rate band would see lower figures.
The comparison shows why tax is treated as a cost alongside charges. The effect is separate from, and additional to, the costs described in why investment fees matter, and both compound over a long holding period, a theme explored in what long-term investing involves.
Is tax a reason to change how you invest?
Tax rules are a reason to understand a portfolio, not necessarily to reshape it. A wrapper can reduce tax, but it does not change an investment’s risk. A sound portfolio is still judged first by whether it suits the investor’s goals and time horizon, a point covered in how diversification actually works.
A few questions are nevertheless worth asking about any non-ISA holding:
- What income does it pay, and into which Income Tax band will that income fall?
- What gain has it built up, and how does that compare with the £3,000 annual exempt amount?
- Would a sale trigger a Self Assessment reporting requirement?
- Is there unused ISA allowance for the current tax year, which runs from 6 April to 5 April?
Tax allowances reward attention, not complexity
The 2026 to 2027 picture is a £500 dividend allowance, a £3,000 exempt amount for gains and a £20,000 ISA limit. Beyond them, dividend rates of 10.75% to 39.35% and CGT rates of 18% or 24% mean that the band an investor sits in matters a great deal. Because allowances and rates have changed in recent years and may change again, they should be checked against the official pages for the relevant tax year before any decision is made.
This is general information, not personalised financial advice. Tax rules, allowances and rates change, and their effect depends on individual circumstances.
Sources: GOV.UK
