If you’ve made any profit from investments during an accounting period, you may be liable for investment tax. The amount owed will depend on the type of investment, where you hold your investments, and the profit earned. Here’s everything you need to know about the tax on investments in the UK.
Investment tax explained
Just as you pay income tax on earnings from your business, you must pay investment tax on earnings from investment gains. Taxation on investment income falls into two primary categories:
Income tax: includes any interest received from savings accounts or money from share dividends
Capital gain tax (CGT): refers to taxes owed on profits you’ve earned from selling an investment asset
In general, within the UK the following types of investment income are liable for taxation:
Capital gains from sale of property or shares
Interest from savings accounts
Income from a pension account
How much tax do you pay on investments?
Investment income is taxed at different rates, with specific tax-free allowances and entitlements that you might be able to use.
Tax-free allowances include the personal savings allowance and dividend allowance. These have been set up by the UK government to encourage investing and saving, but both will be impacted by your income and corresponding tax bracket. We’ll look at these in greater depth below.
Investment income and tax rates
Your taxation of investment income will also depend on the tax rate you fall into. Income tax is progressive, meaning that the higher your income, the higher your tax rate. Beyond the tax-free personal allowance, income tax rates are:
£12,500 to £50,000 – 20%
£50,001 to £150,000 – 40%
£150,001 and above – 45%
The types of investment that contribute to your income, like dividends and interest payments, should be worked into your income tax calculation. Drawing your pension is one example, as is rental income from property investments. However, when you sell an investment property, the profit would be calculated under capital gains tax instead.
Capital gains tax on investments
Capital gains tax is applied when you sell any asset at a profit. This could be property, stocks and shares, or other valuable items. The capital gains tax allowance gives you some leeway with a tax-free amount of profit. For example, the amount was £12,300 for the 2020/2021 tax year. Any profit above this amount would be subject to capital gains tax.
Reducing investment tax liability with allowances
The personal savings allowance (PSA) currently allows you to earn up to £1000 in interest from your savings accounts before any tax is due. With low interest rates, this is a large allowance that will cover many individuals. However, this taxation of investment income depends on your income tax level. Higher rate taxpayers only have an allowance of £500 per year, while those in the highest tax bracket cannot use the PSA at all.
By contrast, the dividend allowance (DA) refers to tax on stocks and shares, or rather the dividends earned from these tools. For the 2020/2021 tax year, the DA is capped at £2000 for individuals. If you earn more than this amount from your stock portfolio, the earnings are added to your income tax with progressive rates applied.
Another factor that impacts tax on stocks and shares as well as interest from savings is the individual savings account (ISA). With an ISA, any income or dividends are automatically tax-free. This makes them an ideal vehicle for reducing investment tax bills.
How to calculate the tax on investments UK
Calculating your taxes on stocks, shares, interest, and other investments depends on your income level and the allowances outlined above.
Step 1: Add up your profits for the accounting year, both from earned interest and capital gains.
Step 2: Subtract applicable tax-free allowances, deductions, or credits.
Because investment tax can be complicated, it’s a good idea to use a tax adviser or keep detailed, accurate profit and loss records to fill in your return on the HMRC website.
It’s also important to keep these figures in mind when making investment decisions, as different vehicles will carry different tax implications. Finally, remember that tax laws change from year to year.
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