Fund and ETF Distributions: Taxed as Dividends or as Interest?
A payment from a fund or ETF is called a distribution, and outside an ISA it is taxed either as a dividend or as interest. Which one depends on what the fund holds, and getting it wrong puts income in the wrong box on your tax return and uses the wrong allowance.
Distributions from equity funds are dividends: they use the £500 dividend allowance and are taxed at 10.75%, 35.75% or 39.35% in 2026/27.5 A UK authorised fund can only pay interest distributions if more than 60% of its investments are interest-bearing throughout the period,1 and an offshore fund's distribution is treated as interest if it fails the same 60% test,2 so most bond funds and bond ETFs pay interest, taxed as savings income with the Personal Savings Allowance.4 Offshore reporting funds can also give you excess reportable income to declare even when they pay out nothing.3 Inside an ISA none of this is taxed.6
- Equity fund distributions: dividends (£500 allowance, then dividend rates).5
- UK authorised funds: interest distributions only if qualifying investments exceed 60% of the fund throughout the distribution period.1
- Offshore funds (for example many ETFs domiciled abroad): a distribution is treated as interest if qualifying investments exceed 60%.2
- Interest uses the Personal Savings Allowance: £1,000 basic rate, £500 higher rate, £0 additional rate.4
- Excess reportable income is treated as received six months after the end of the fund's reporting period.3
The 60% test that decides it
For a UK authorised fund (an OEIC or authorised unit trust), the law only allows an amount to be distributed as interest if the market value of the fund's qualifying investments, broadly interest-bearing assets such as bonds and cash deposits, is more than 60% of all its investments at all times in the distribution period.1 Otherwise the distribution is a dividend.
For an offshore fund, such as an ETF domiciled in Ireland or Luxembourg, the rule runs the other way round: what it pays is a dividend unless the fund fails the qualifying investments test, in which case the payment is treated as interest for income tax.2 The 60% threshold is the same. So a global equity ETF pays dividends and a government bond ETF pays interest, whatever the platform calls the payment.
What £3,000 of equity fund distributions costs
Dividend tax on £3,000 of distributions from an equity fund held outside an ISA, from our calculator engine for 2026/27, with the distributions sitting on top of a salary:
| Salary £20,000 | £268.75 |
| Salary £49,000 | £701.25 |
| Salary £60,000 | £893.75 |
The first £500 is covered by the dividend allowance; the rest is taxed at the rate for the band it falls in.
If the same income came from a bond fund, it would be interest instead: the Personal Savings Allowance of £1,000 for a basic-rate taxpayer or £500 for a higher-rate taxpayer would apply first, and the starting rate for savings can cover up to £5,000 more if your other income is low.4 The dividends and savings interest guide, linked below, works through a mixed account.
Excess reportable income: tax on money you never received
Many offshore ETFs are reporting funds. Each year they report their income per unit, and if the reported income is more than they paid out, the excess is treated as an extra distribution to everyone who held units at the end of the reporting period.3 It is treated as made on the fund distribution date, six months after the end of the reporting period, so it falls in the tax year that contains that date.3
Accumulating share classes, which reinvest instead of paying out, are where this matters most: the whole income can be excess reportable income. You declare it for the tax year containing the fund distribution date, using the per-unit figure in the fund's report.
Where to find the figures
- Your platform's consolidated tax certificate normally lists dividend distributions and interest distributions separately for UK funds.
- Offshore funds publish their reportable income per unit; multiply by the units you held at the end of the reporting period.
- Anything held in a Stocks and Shares ISA or a pension is left out entirely.6
- Dividends of more than £10,000 in the year mean a Self Assessment return; our Self Assessment guide explains how to declare them.
Check the dividend side
Enter your salary and fund dividends to see the dividend tax for 2026/27.
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Sources & references
Every headline figure in this guide is drawn from the official HMRC and GOV.UK sources below and reflects the confirmed 2026/27 rates. Each link opens the relevant official page in a new tab.
- Authorised Investment Funds (Tax) Regulations 2006, regulation 19: qualifying investments test ↗ https://www.legislation.gov.uk/uksi/2006/964/regulation/19
- Income Tax (Trading and Other Income) Act 2005, section 378A: offshore funds, dividends treated as interest ↗ https://www.legislation.gov.uk/ukpga/2005/5/section/378A
- Offshore Funds (Tax) Regulations 2009, regulation 94: excess reportable income ↗ https://www.legislation.gov.uk/uksi/2009/3001/regulation/94
- Tax on savings interest: how much is tax free ↗ https://www.gov.uk/apply-tax-free-interest-on-savings/how-much-is-tax-free
- Tax on dividends ↗ https://www.gov.uk/tax-on-dividends
- Individual Savings Accounts (ISAs) ↗ https://www.gov.uk/individual-savings-accounts
Frequently asked questions
Is a bond ETF distribution a dividend or interest?
Are equity ETF distributions taxed as dividends?
Do I pay tax on an accumulating ETF that pays nothing out?
What if a UK fund holds about 60% in bonds?
Which allowance does a bond fund distribution use?
Disclaimer: General information about UK tax for 2026/27, not personal tax advice. Figures assume England, Wales or Northern Ireland income tax bands unless stated.