Do you pay tax on investments?
Any profits made from investments will be subject to tax. The exception is if you are trading within an individual savings account (ISA) or self-invested personal pension (SIPP). Both of these are wrappers that you can use to shelter your investments from tax.
For other investments, the amount of tax you pay will depend on several factors. These include your personal tax situation and the amount of profit made.
What taxes do I pay on investments?
The main ways you can be taxed include:
Income tax
When you invest, you’ll receive income through either dividends or interest payments. If you receive income via interest payments (if you’ve invested in bonds, for instance), you might need to pay income tax. How much you pay will depend on your income tax band and allowances.
Any money you earn through interest, wages or a pension is tax-free up to your personal allowance of £12,570.
On top of that, if you’re a basic rate taxpayer, you have a personal savings allowance of £1,000. This means you can earn interest of up to £1,000 tax-free each year.
If you’re a higher-rate taxpayer, your allowance is £500. If you’re an additional-rate taxpayer, there’s no personal savings allowance.
You’ll need to pay tax on any interest you earn above these allowances and your ‘starting rate’ for savings. The starting rate only applies if your other income (for example, wages or pension) is less than £17,500 a year. If you qualify, you could earn up to £5,000 in interest without paying tax on it.
HMRC will tax any interest you earn above these allowances at your income tax rate.
Dividend tax
If you receive money from share dividends, a dividend tax may apply. Dividends are a portion of a company’s profits periodically paid to shareholders.
You don’t need to pay tax on any dividend income that falls within your personal allowance. You also have an annual tax-free dividend allowance, which is £1,000 for the 2023/24 tax year.
Again, the amount of tax you pay on dividends above this allowance depends on your income tax band.
Capital gains tax
Capital gains tax (CGT) is payable on the profit (or gains) you make when you sell any investments that have increased in value over time.
For example, if you bought shares for £2,000 and later sold them for £10,000, you’d have made a capital gain of £8,000. Tax may then be due on this £8,000 profit.
However, this would only be the case if your gains exceeded your CGT allowance, which stands at £6,000 for the 2023/24 tax year but will drop to £3,000 from 6 April 2024.
You won’t usually need to pay tax on gifts to your spouse, civil partner or a charity. You also won’t need to pay GCT on certain assets, including any gains you make from:
ISAs and PEPs
UK government gilts or Premium Bonds
Betting, lottery or pool winnings
The amount of CGT due on stocks and shares will depend on your tax bracket. To calculate how much is due, you add your gains to your income – if the total falls within the basic rate tax band, you pay 10%. If it falls within the higher rate tax band, you pay 20%.
When you buy shares, you may have to pay stamp duty, which is calculated differently depending on how you buy your shares.
If you use a stock transfer form, also known as a paper transfer form, and the transaction is over £1,000, you’ll pay stamp duty at a rate of 0.5% (rounded up to the nearest £5). You must send a copy of your stock transfer form to the Stamp Office within 30 days of it being signed and dated.
If you buy your shares electronically through the computerised register of shares and shareowners system (CREST), you’ll pay Stamp Duty Reserve Tax (SDRT). It is charged at 0.5% and automatically deducted when you buy the shares.
You must also pay SDRT if you buy shares outside CREST, known as ‘off market’ transactions.
How to pay tax on savings and investments
The way you pay tax on savings and investments will depend on how you usually pay tax.
If you’re employed or receive a pension, HMRC should update your tax code so that you pay the required amount of tax. This should happen automatically for savings interest. But you must inform HMRC if you earn between £1,000 and £10,000 in dividend income.
You'll need to complete a self-assessment tax return if you earn more than £10,000 from savings and investments. The same applies if you exceed your CGT allowance.
What are the most tax-efficient investments?
If you want to reduce the amount of tax you pay on your investments, consider the following options:
ISAs: You can save into an ISA tax-free. However, there is a limit to the amount you can stash away into an ISA each tax year. The maximum is currently £20,000. You can use your annual allowance to pay into a cash ISA, stocks and shares ISA, or innovative finance ISA – or a combination of all three.
Pensions: When you save into a pension, the government boosts your contributions through tax relief. You’ll receive an extra 20% on your contributions if you're a basic rate taxpayer. If you’re a higher rate taxpayer, you’ll get an extra 40%, while additional rate taxpayers receive 45%. Note that you will usually pay income tax on pension withdrawals that are above your 25% tax-free allowance.
It’s important to consider these tax implications before making any investment decisions. If you’re unsure about any details, it’s worth talking to a tax adviser for specialist advice.
