Just like the money you earn from your job, investments that earn you money may result in you needing to pay tax. Depending on the investments you hold and how much they make in returns, there are various types of tax for you to be aware of, including Income Tax, Capital Gains Tax and Stamp Duty Reserve Tax. If your investments are held within an ISA, you won’t need to pay Income Tax or Capital Gains Tax.
Here’s a quick guide on how tax on investments might affect you.
Income Tax
When you receive income on your investments (interest or dividends) 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 in an ISA. Please note that tax rates and bands are different in Scotland - visit this page to learn more about income taxes in Scotland.
When you invest, you can receive income in two ways: via dividends and via interest payments. Dividends are paid out by some companies to shareholders, whereas those holding government or corporate bonds may receive interest payments.
Dividends:
For the 2020/21 tax year, the first £2,000 of income from dividends you earn is tax-free. Any income above this threshold will be taxed at different rates depending on your tax band:
| Basic rate | Higher rate | Additional rate |
|---|---|---|
| 7.5% | 32.5% | 38.1% |
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. If you’re a higher rate taxpayer, your allowance is £500. If you’re an additional rate taxpayer, you don’t have a Personal Savings Allowance.
You’ll pay tax on any interest above your allowance and your starting rate. Here’s how much you’d be paying depending on your tax band:
| 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 investments that have increased in value. 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 gain would potentially be subject to tax. You only have to pay this tax on your overall gains above your tax-free allowance, which is £12,300 for 2020/21.
Stamp Duty Reserve Tax
If you purchase UK shares online, you will usually pay a Stamp Duty Reserve Tax (SDRT) of 0.5%. It is automatically taken at the time of the purchase – a bit like airport tax being included in the cost of your flights.
However, investment funds are not liable for Stamp Duty, making them even more attractive to novice investors.
Reporting tax
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 can always contact HMRC on 0300 200 3300 or online and ask for help.
Figures taken from https://www.gov.uk/
The tax treatment depends on your individual circumstances and maybe subject to change in the future.
Please remember that the value of your investments can go down as well as up and you can get back less than invested.
