Answers · UK 2025/26

How does an investment bond work in the UK?

An investment bond is a life assurance wrapper for investments. You can withdraw up to 5% of the original investment each year without immediate tax. Any gain is taxed as income (not CGT) when a chargeable event occurs, such as a full surrender. Top-slicing relief can reduce the tax on large gains.

Last updated: 10 June 2026Last reviewed: 10 June 2026How we verify

Full answer

An investment bond is a single-premium life assurance policy that holds investments such as funds or shares. It comes in two main types: onshore (UK-based insurer, subject to UK tax internally) and offshore (typically based in a jurisdiction such as Ireland or the Isle of Man, with different internal tax treatment). The key tax feature is deferred taxation. Each year, you can withdraw up to 5% of the original investment without triggering an immediate tax charge -- this is the tax-deferred withdrawal allowance. You can carry forward unused 5% allowances from previous years. For example, if you invest £100,000, you can take £5,000 a year tax-deferred. If you take nothing for 5 years, you can then take £25,000 (5 x 5%) in year 6 without an immediate charge. The tax is deferred, not exempt -- when a chargeable event occurs (full surrender, partial withdrawal above the 5% cumulative limit, death, or assignment), a chargeable gain arises. This gain is taxed as income, not as a capital gain, so it cannot use the CGT annual exempt amount. The gain is added to your other income for the year and taxed at your marginal Income Tax rate. Top-slicing relief is available to soften the effect of a large one-off gain. It works by spreading the gain over the number of years the bond has been held, taxing only the average annual gain, and then multiplying the tax by the number of years. This prevents a large gain from pushing a basic-rate taxpayer into the higher rate. Onshore bonds have notional basic-rate tax paid internally, so basic-rate taxpayers usually have no further liability; offshore bonds do not have this, so the full gain is charged to Income Tax. Investment bonds can be useful for higher-rate taxpayers who expect to be basic-rate taxpayers in retirement. Use a savings calculator to compare returns from an investment bond versus an ISA for your circumstances.