WATCH: How to navigate investment taxes
Sign up for our fortnightly Compass newsletter
Everybody knows taxation is inevitable. It should come as no surprise, therefore, to learn that when we invest there are taxes we need to navigate.
As an investor you should familiarise yourself with the following payments that may be due as you pursue a long-term investing plan:
Capital Gains Tax – This is a tax due when you realise a return on an investment. You will only have to pay it when you sell an investment. How much you’ll pay depends on what income tax band you’re in.
Dividend Tax – Dividends paid out by investments you hold are also subject to taxation. Once again, the amount you pay will correspond to your income tax band.
Stamp Duty Reserve Tax – If you’re purchasing UK shares, you’ll be paying stamp duty. When buying shares electronically – e.g., via a trading app – this charge equates to 0.5% of the transaction and is normally automatically included in the cost of a trade.
If you’re purchasing stocks non-electronically, you’ll be charged 0.5% of transactions over £1,000 in value and this will be rounded up to the nearest £5.
For capital gains and dividends taxes, you are given a personal allowance each year. This means you don’t have to pay UK tax if your gains or dividends are under a certain amount. Allowances, however, are scheduled to be reduced in tax year 2023/24 and 2024/25.
When we talk about “tax efficiency”, we mean taking advantage of investment accounts that are at your disposal to limit the amount of tax you’re liable to pay.
There are two specifically that we’ll highlight here:
Stocks & Shares ISAs – You don’t have to pay any UK taxes on capital gains or dividends generated by investments held in a Stocks & Shares Individual Savings Account, or ISA. The government allows you to deposit up to £20,000 in such an account every tax year.
SIPPs – A Self-Invested Personal Pension (or SIPP) works slightly differently to an ISA. You can contribute £40,000 or 100% of your income annually – whichever is greater.
Once again, you won’t have to pay UK dividend and capital gains taxes. Additionally, you’ll qualify for government tax relief. This is a government contribution to your pension and how much you can claim depends on what rate you pay for income tax.
There are some other rules impacting higher earners and, unlike an ISA, you won’t be able to withdraw money until you’re 55-years-old.
Making use of these accounts can have notable benefits over the long term given they limit your tax liability. Our video below explains these and investment taxes in more detail.
Tax treatment will depend on your individual circumstances and could potentially change in the future. Capital at risk.
Scan the QR code to install the app
- 01Scan the QR code with your mobile phone's camera
- 02Download the app from your app store
- 03Follow the in-app instructions to create an account in minutes
When you invest, your capital is at risk.