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 an ISA), you won't have to pay tax on the 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 the beginning 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 of these.
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 with us 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 bands are different in Scotland. Visit the Government website to 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, depending on your income tax band (aka, whether you are a basic rate, higher rate, or additional rate taxpayer):
| Basic rate | Higher rate | Additional 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 rate | Higher rate | Additional 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 your Capital Gains tax allowance. 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 shares using 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 a full 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.
The tax treatment depends on your individual circumstances 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.
Resources:
Figures taken from GOV.UK
