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Investment tax in the UK: How do I pay it?

By Zoran Temelkov

Everything you need to know about taxes on investments in the UK

Paying taxes on investments in the UK is not as complicated as it may seem if you are aware of the tax rules, know the distinction between different types of instruments and the tax rate applied for different types of income or gains.

In general, aside from a rental property, you can decide to invest in ISA, savings accounts, different types of shares and investment units or debt instruments. The potential profit you can make from the investment may come in the form of interest income, capital gain or dividend.

Interest income

  • The interest you will earn on your savings is subject to a £1,000 tax allowance if you are in the basic tax rate band or £500 if you fall within the higher tax rate band.
  • There is no allowance for additional rate taxpayers.
  • The savings interest is taxable when you receive it and this can be earned from bank accounts, credit unions, building societies, bonds, interest earned on foreign currency bank accounts and certain interest earned through P2P lending platforms.

Dividends

You can also make money in the form of dividends paid out by the company. This income is subject to dividend tax according to the UK tax law. There is also a dividend tax allowance for 2019-20 of up to £2,000 (which was decreased from £5,000 allowance applicable for the tax year 2017-18) and you pay tax on any amount above the maximum tax allowance with reference to your tax bracket.

You will pay:

  • 7.5 per cent tax if you fall within the basic tax rate
  • 32.5 per cent if you are within the higher rate
  • 38.1 per cent if you are within the additional rate.

You need to tally up the income from dividends with your other income in order to find the tax band you belong in. If the income generated from your investment is your sole income, you can ask for a tax-free personal allowance. Aside from the £2,000 dividend allowance, you may be entitled to an additional £12,500 tax-free allowance for 2019-20.

There is a different procedure for reporting your dividend earnings when you receive a dividend above the allowance. Accordingly, if you receive dividends from £2,000 up to £10,000, you need to inform the HMRC by calling their helpline and informing them that your tax code needs to be changed. Afterwards, the tax will be deducted from your wages or pension. If you receive a dividend above £10,000 then you will need to file a self-assessment tax return and you will be told how to proceed.

Capital Gains Tax

When you generate a profit in excess of £12,000, which is the maximum threshold allowance for the 2019-20 tax year, you will pay Capital Gains Tax (CGT) on the amount above the minimum threshold. The tax allowance for 2018-19 tax year was £11,700. The applicable tax rate depends on your tax bracket. Accordingly, you will pay 10 per cent tax if you are under the base rate tax level, whereas you will need to calculate 20 per cent on your gains if you fall within the higher rate taxpayer category.

When you are not liable to pay taxes?

There are some circumstances when you don't pay tax and these are investments in stocks and shares from individual savings account (ISA) and pensions or if you transfer your shares to your spouse or civil partner. However, there is a maximum ISA allowance of £20,000. Other types of investments or instruments when you don't pay taxes or the CGT are:

  • Shares from Share Incentive Plans (SIP)
  • UK government gilts (along with Premium Bonds)
  • Certain qualifying corporate bonds
  • Certain employee shareholders shares – according to the HMRC, you are liable to pay CGT when you earn over £100,000 during your lifetime.

Taxes when you buy shares

Apart from the taxes which you pay in accordance with the type of income or gain, you will also pay tax or duty of 0.5 per cent of the transaction when you purchase shares. If you make the purchase electronically, the tax you pay is called Stamp Duty Reserve Tax (SDRT). If you make the purchase of share through a stock transfer form, then you pay Stamp Duty for transactions above £1,000.

The tax is paid based on the shares purchase price irrespective of their market value. A 1.5 per cent tax can be levied when you make a transfer of shares to a "depository receipt" scheme or "clearance services".

Issues to consider when calculating your CGT

Calculating your Capital Gains Tax bill if you have purchased shares or units from the same issues but at different times means that you should pay attention to the order in which the purchases were made as well as sold. According to the HMRC, you should match the shares and units you have sold with the appropriate purchase in the following manner:

  • Shares purchased on the same day
  • When you have purchased the same type of shares from the same company within a 30-day period after you have sold the previously owned ones.
  • Remaining shares – are considered to be pooled and bought at an average price.

Additionally, before you calculate the CGT, you need to know which costs incurred during the purchase or sale of shares are deductible from your taxes. Some costs that can be deducted are the fees you have paid (broker fees, for example) and Stamp Duty Reserve Tax paid during the purchase of the shares.

The tax system and tax laws can be complex to navigate so even if you've grasped the basics, don't forget to seek advice from a professional tax accountant or contact HMRC .

FURTHER READING: How to calculate return on your investment

FURTHER READING: Which is a better investment – stocks or bonds?

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