Investments can be subject to different types of taxes, depending on how you earn income from them and the type of investment. Here’s an overview of how various investment earnings are taxed in the UK. These vary in rates and for an update understanding of exactly what these taxes are head to our Tax Planning Hub which you will find a link to at the top of the homepage.
- Capital Gains Tax (CGT): When you sell an asset, such as stocks, property, or mutual funds, for more than you paid for it, the profit is called a capital gain. If your total gains exceed the annual CGT allowance, you’ll have to pay tax on the excess amount. The CGT rate depends on your income tax band.
- Dividend Tax: If you receive dividend income from shares or investment funds, it may be subject to tax. You have a tax-free dividend allowance each year, and any dividend income above this is taxed.
- Interest Income Tax: Interest earned from savings accounts, bonds, or other interest-bearing investments is taxable. However, the Personal Savings Allowance allows you to earn a certain amount of interest tax-free. Interest earned from investments in tax-efficient accounts, like ISAs (Individual Savings Accounts), is tax-free.
- Income from Property Investments: If you invest in property and earn rental income, this income is subject to Income Tax. Expenses such as mortgage interest, maintenance, and management fees may be deductible, reducing your taxable income. Profit from the sale of a rental property may also be subject to Capital Gains Tax.
- Tax-Advantaged Accounts: Investments held within tax-advantaged accounts, like ISAs and pensions, offer significant tax benefits:
- ISAs: No tax on income, interest, or capital gains from investments held within an ISA.
- Pensions: Contributions often receive tax relief, and investment growth is free from tax. However, you may pay tax on withdrawals, depending on your income level in retirement.
- Inheritance Tax (IHT): Certain investments, like those in pension schemes, may be exempt from Inheritance Tax. Other investments, such as shares or property, may form part of your estate and be subject to IHT if your total estate exceeds the inheritance tax threshold.
Tax Planning Tip: Using tax-efficient accounts like ISAs and pensions and staying aware of tax allowances can help minimise your tax liability. Tax rules can be complex, so consider consulting a financial adviser or tax professional for personalized guidance on how to manage your investments in a tax-efficient manner.
