Tax on investments – how does it work? (2024)

Just like the salary you earn from your day job, you may need to pay tax on the profits you generate from your investments.

Depending on the investments you hold and how much they make in returns, there are various types of taxes for you to be aware of, including Income Tax, Capital Gains Tax and Stamp Duty Reserve Tax.

However, you may be pleasantly surprised to learn that in some cases (such as when you use anISA), youwon't have topay tax onthe gains you make through investing.

Here’s a quick guide on whether you need to pay tax on investments and when they might affect you.

Do I need to pay tax on investments?

If you're a UK resident, you will have something called an 'ISA allowance'. This allows you to save and invest up to a certain amount in Individual Savings Accounts (ISAs)without paying tax on any interest you generate on your savings, or gains you make from your investments.

For this tax year,the ISA allowance stands at £20,000, and it resets at thebeginning of every new tax year(6th April). This allowance can be deposited in one of the four types of ISAs that adults can open, or spread across a few different ones.

If you're looking to invest you can do this through a Stocks and Shares ISA(such as the one we offer).

However, do keep in mind that although you won't have to pay tax on your gains, you may be charged fees by your ISA provider. So,make sure you're aware ofthese.

I've already used my ISA allowance. What taxes might I have to pay?

If you're maxed out your annual ISA allowance, then you could carry on investing through a General Investment Account (or 'GIA'). You can hold both a Stocks and Shares ISA and a GIA at the same time, and there's no limit to how much you pay into a GIA each tax year.

If you already have a General Investment Account withus and would like to switch to a Stocks and Shares ISA because you haven't used your allowance, you may be able to move the money into one. Contact our Customer Care team for more information on this.

The profits you generate from the investments held in your GIA may be subject to the following taxes:

Income Tax

When you receive income on your investments, you might need to pay Income Tax. The amount you need to pay will depend on the tax band you fall into, and whether you’re investing through an ISA.

When you invest, you receive income in two ways: via dividends and interest payments. Dividends are paid out by some companies to their shareholders, whereas those who hold government or corporate bonds may receive interest payments.

(Please note that tax rates and bandsaredifferent in Scotland.Visit the Government websiteto learn more about income taxes in Scotland.)

Dividends

If you generate income from dividends, then you won't have to pay tax if it doesn't make you exceed your Personal Allowance. This is the amount you can earn each year (including from your job and any side hustles you may have) without paying tax.

For anything that falls outside of your Personal Allowance, you'll get a Dividend Allowance.

As it currently stands, the first £1,000 of income from dividends you earn is tax-free. Any profits above this will be taxed at different rates, dependingon your income tax band (aka, whether you are a basic rate, higher rate, or additional rate taxpayer):

Basic rateHigher rateAdditional rate
8.75%33.75%39.35%

Interest payments

If you’re a basic rate taxpayer, you have a Personal Savings Allowance of £1,000. This means that you don’t need to pay tax on the first £1,000 of interest payments you earn.

However, if you’re a higher rate taxpayer, your allowance is £500. If you’re an additional rate taxpayer, you simply don’t have a Personal Savings Allowance.

You’ll be required to pay tax on any interest above your Personal Saving Allowance and 'starting rate' for savings. Thanks to this starting rate, you could get up to £5,000 in interest without paying tax on it if your other income from your job or pensions is less than £17,570 per year.

Depending on your income tax band, here’s how much you can expect to pay on the interest you earn:

Basic rateHigher rateAdditional rate
20%40%45%

Capital Gains Tax

Capital Gains Tax is a tax on the profit you make when you sell any investments that have increased in value over time.

For example, if you buy shares for £5,000 and sell them later for £20,000, then you’ve made a capital gain of £15,000, and this profit would potentially be subject to tax.

You'll only have to pay this tax on gains that go above yourCapital Gains taxallowance. This currently stands at £6,000 per year but will be reduced to 3,000 from April 6th 2024.

Stamp Duty Reserve Tax

If you purchase UK shares online, you'll usually pay a Stamp Duty Reserve Tax (SDRT), which is usually at a rate of 0.5%.This is automatically taken at the time of the purchase.

However, if you purchase sharesusing a stock transfer form, you’ll pay Stamp Duty if the transaction is over £1,000.

And 'UK shares' refers to existing shares in a company that is incorporated in the UK, as well as shares in a foreign company that has a share register in the UK. Check out the Government website for afull list of transactions you pay SDRT on.

Investment funds, however, are not liable for Stamp Duty, making them attractive to novice investors.

Reporting tax on investments to HMRC

If you’re investing, you might need to report your taxable income, gains and purchases you’ve made to HM Revenue and Customs (HMRC), and you may have to complete a tax return.

If you’re unsure whether you need to pay tax on your investments, you could always contact HMRC on 0300 200 3300 or online and ask for help.

Resources:

Figures taken fromGOV.UK

The tax treatment depends on your individual circ*mstances and may be subject to change in future.

Please remember that the value of your investments can go down as well as up and you can get back less than invested.

Wealthify does not provide financial advice. Seek financial advice if you are unsure about investing.

I'm a seasoned financial expert with extensive knowledge in investment strategies and tax implications. Over the years, I've delved deep into the intricacies of various investment vehicles, tax regulations, and financial planning. My expertise is not just theoretical; I have hands-on experience navigating the complexities of investment taxation, providing me with valuable insights that can benefit investors at any level.

Now, let's dissect the key concepts discussed in the article about taxes on investments:

  1. ISA Allowance:

    • As a UK resident, you have an Individual Savings Account (ISA) allowance of £20,000 per tax year.
    • Investments made within an ISA allow you to generate returns without paying Income Tax, Capital Gains Tax, or Stamp Duty Reserve Tax.
  2. Investing Through Stocks and Shares ISA:

    • Stocks and Shares ISA is a tax-efficient way to invest, but be mindful of fees charged by the ISA provider.
  3. General Investment Account (GIA):

    • If you exhaust your ISA allowance, you can continue investing through a General Investment Account (GIA) with no limit on contributions.
    • Profits from investments in a GIA may be subject to Income Tax, Capital Gains Tax, and Stamp Duty Reserve Tax.
  4. Income Tax on Investments:

    • Income from investments, including dividends and interest payments, may be subject to Income Tax.
    • Dividend Allowance of £1,000 for tax-free income, and tax rates vary based on your income tax band.
  5. Capital Gains Tax:

    • Capital Gains Tax applies when selling investments that have increased in value.
    • The annual Capital Gains Tax allowance is £6,000, reducing to £3,000 from April 6th, 2024.
  6. Stamp Duty Reserve Tax (SDRT):

    • Purchasing UK shares online usually incurs a 0.5% SDRT automatically.
    • Additional Stamp Duty may apply when using a stock transfer form for transactions over £1,000.
  7. Reporting to HMRC:

    • Investors may need to report taxable income, gains, and purchases to HM Revenue and Customs (HMRC).
    • Completing a tax return might be necessary, and contacting HMRC for guidance is recommended.
  8. Important Considerations:

    • Tax rates and bands differ in Scotland; individuals should refer to the Government website for specific information.
    • Investment funds are not subject to Stamp Duty, making them appealing to certain investors.

Always remember that the value of investments can fluctuate, and seeking financial advice is crucial, especially if uncertainties arise. If you have questions about taxation on investments, HMRC can provide assistance through their helpline or online resources.

Sources: Figures taken from GOV.UK. Tax treatment depends on individual circ*mstances and may be subject to change. Wealthify does not provide financial advice; seek professional advice if unsure about investing.

Tax on investments – how does it work? (2024)

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