Understanding investment taxes
Investing can be a great way to grow your wealth over time, but it's important to remember that the gains you make can be subject to taxes. This blog post aims to explain how investment taxes work in the UK, the various types of investment taxes, and some strategies to manage and potentially reduce the amount of tax you pay.
What are Investment Taxes?
When you earn money from investing, whether that's from selling investments at a profit or earning dividends or interest, you may have to pay tax. The type of tax and the rate you'll pay often depends on the kind of investment, how much profit you've made, and your overall financial situation.
Capital Gains Tax
Capital Gains Tax (CGT) is a tax on the profit when you sell (or 'dispose of') something (an 'asset') that's increased in value. It's the gain you make that's taxed, not the amount of money you receive.
Unlike income tax, CGT is not automatically deducted by the inland revenue and needs to be self-reported. There are so many different fiscal triggers, so it is important to be aware of what needs to be reported.
If you don’t provide accurate reports, you will pay a fine worth far more than the deduction would have been, should you fail to notify HMRC.
Dividend Tax
If you own shares in a company, you may receive dividends, which are a share of the company's profits. Dividends are taxed differently from income and have their own tax-free Dividend Allowance.
Any dividends received above this allowance are taxed at a rate of 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers.
Interest Tax
If you have money in a savings account or invest in bonds, you'll earn interest. In the UK, your Personal Savings Allowance lets you earn up to £1,000 in interest tax-free if you're a basic rate taxpayer or £500 if you're a higher rate taxpayer. Additional rate taxpayers do not have a Personal Savings Allowance.
Investment Taxes and ISAs
One way to shield your investments from taxes is by using an Individual Savings Account (ISA). The main types of ISAs relevant to investors are Cash ISAs, Stocks and Shares ISAs, and Innovative Finance ISAs. You can find out more about investment taxes here.
Final thoughts
Taxes on investments can be complex, but understanding the basics can help you plan your investment strategy more effectively. Always remember that tax rules can change, and the reliefs and allowances depend on your individual circumstances.
As with any major financial decisions, it's often a good idea to seek professional advice if you're unsure about your tax obligations. A tax advisor or financial planner can help you understand your situation and potentially reduce the amount of tax you have to pay.
The value of units can fall as well as rise, and you may not get back all of your original investment. The tax treatment is dependent on individual circumstances and may be subject to change in future. Tax planning is not regulated by the Financial Conduct Authority.
Approved by In Partnership FRN 192638 July 2023