Finance⏱ 5 min read
How to Calculate Investment Returns After Tax
Gross returns look great. After income tax, capital gains tax, and dividend tax, the picture is quite different. Here is how to calculate your true after-tax return across different account types.
A 10% gross return in a taxable account and a 10% return in an ISA are not equivalent. Tax significantly changes the effective return — and the effect compounds over time. Understanding the after-tax calculation is essential for comparing investment options.
The Three Investment Taxes
1. Income tax on interest and dividends:
Bank interest: taxed as income (20%, 40%, or 45%)
Dividend income: taxed at dividend rates (8.75%, 33.75%, or 39.35%)
Personal Savings Allowance: £1,000 (basic) or £500 (higher rate) of interest tax-free
Dividend allowance (2024/25): £500 per year
2. Capital Gains Tax (CGT) on investment profits:
Basic rate: 18% (residential property) or 10% (other assets from Apr 2024)
Higher rate: 24% (residential property) or 20% (other assets from Apr 2024)
Annual exempt amount (2024/25): £3,000
3. Inside an ISA or SIPP: all of the above are ZERO (within ISA)
SIPP: contributions get tax relief, withdrawals taxed as income.
After-Tax Return Calculation
General investment account (basic rate taxpayer):
Gross return: 8% (5% capital gain + 3% dividends)
Dividend tax: 3% x 8.75% = 0.26% tax drag
CGT: 5% x 10% = 0.50% tax drag (assuming gains realised annually)
After-tax return: 8% - 0.26% - 0.50% = 7.24%
Same investment in ISA:
After-tax return: 8% (no tax drag)
Over 20 years at £10,000:
ISA: £10,000 x (1.08)^20 = £46,610
Taxable account: £10,000 x (1.0724)^20 = £40,545
Difference: £6,065 from tax drag alone
Higher Rate Taxpayer (40%)
Gross return: 8% (5% capital gain + 3% dividends)
Dividend tax: 3% x 33.75% = 1.01% tax drag
CGT: 5% x 20% = 1.00% tax drag
After-tax return: 8% - 1.01% - 1.00% = 5.99%
Over 20 years at £10,000:
ISA: £46,610
Taxable account: £10,000 x (1.0599)^20 = £32,075
Difference: £14,535 — dramatic impact of higher rate tax
This is why ISA allowance (£20,000/year) should be used
before any other taxable investment account for most people.
Pension vs ISA: After-Tax Comparison
Pension (SIPP) contribution for basic rate taxpayer:
£800 net contribution -> government adds 20% tax relief -> £1,000 in pension
At withdrawal (age 55+): 25% tax-free lump sum, remainder taxed as income
ISA contribution:
£1,000 net contribution (from after-tax income) -> £1,000 in ISA
Withdrawal: 100% tax-free at any time
Pension wins when:
Contribution rate > withdrawal tax rate
(e.g. contributing at 40% tax, withdrawing at 20%)
Higher earners should prioritise pension over ISA
ISA wins when:
You may need the money before 55
You expect to be in the same or higher tax bracket at withdrawal
You have used your personal pension allowance