Do I have to pay tax on shares and stocks in the UK? Find out if you have to pay tax on investments and how you can mitigate your tax liability legally.
So, you are thinking of diving into the world of investment and grabbing a few shares in innovative tech startups or environmental companies? You’re not alone as many people can now take advantage of platforms that make trading accessible to anyone without the need for a personal broker.
You don’t even need to know your stuff anymore to make money in the markets thanks to copy trading, which is essentially a way of copying the moves experts make automatically. These trader *might* make you a profit with your eyes shut, but what they can’t help you with is the tax you could have to pay on share profits.
Yes, any profits you make on trading stocks and shares are subject to taxation. There two types of tax that could be applied to you through making money with stocks and shares. These are Capital Gains Tax (CGT) and Dividend Tax.
Capital Gains Tax is a way of taxing your profits from selling the shares back to the broker (or online platform). For example, if you bought shares for £10,000 and sold them years later for £30,000, you will have made a capital gain of £20,000. Some fees are likely to be deducted but to keep things easy, we will assume that the gain is £20,000.
Everyone in the UK has an annual CGT allowance of £12,000 in 2020, meaning we can make a profit from selling shares (and other valuables combined) up to £12,000 without having to pay tax. The amount above this, in the case of our example £8,000, will be subject to CGT.
The amount of tax you pay on profits above £12,000 is either 10% or 20% depending on whether you pay a basic or higher rate of tax. Thus, you could end up paying £800 or £1,600 tax on your £20,000 profit from selling shares.
Dividends are occasional payments made from a company to people who own their stocks and shares. Dividend payments are not always offered because profits are reinvested rather than shared out between shareholders.
However, sometimes people can receive dividend payments from the shares they own, and this will be subject to a special dividend tax.
Just like everyone gets a CGT allowance each tax year, the same happens for dividends. At the time of writing, everyone receives a dividend allowance of £2,000 each financial year. So, if you receive a single dividend payment below £2,000, you won’t owe any tax on it – but you still have to declare it!
Any money above this allowance is subject to a basic rate of 7.5% or a much higher rate of 32.5%. For example, if you received £4,000 in dividend payments you could end up paying £150 or £650 in dividend tax, respectively.
Profits from shares are only subject to tax in the financial year that you make a profit on them. For example, if you bought shares in 2020 but didn’t sell them for a profit until 2023, you will only need to declare the income for CGT purposes in 2023.
If you receive a dividend payment from owning stocks and shares, the dividend payment will be subject to tax in the tax year it was received. In the example above, you might not sell the shares in 2021 but you might receive a dividend payment from owning the shares in 2021. That income will be subject to tax in 2021 only.
There are legal ways to reduce the amount of tax you pay on investment profits. For example, you could use a stocks and shares ISA or contribute to a SIPP.
For more information and help with tax on shares and stocks, reach out to our team at Yorkshire Accountancy!