This page will help you understand the tax implications of investing.
Money that you make investing is normally subject to tax. I do all my investing in a Stocks and Shares ISA so that neither of these taxes are due, but if you have more than the ISA allowance to invest, you may need to report your returns to HMRC.
There are two different taxes to be aware of; Capital Gains Tax and Income tax
Capital Gains Tax
When you buy an asset (part of a company is considered an asset) and sell it for a profit, the profit is subject to Capital Gains Tax. You have an annual tax free allowance, so you’ve got to make a lot of profit before being taxed.
You can also deduct any losses you have made from any gains, to reduce your tax liability.
If you invested £50,000, and the investment was worth £70,000 when you sold it, £20,000 would be subject to capital gains tax rules. The original investment of £50,000 is not subject to Capital Gains Tax, as it is only the profits which are taxed.
If you also invested £20,000, and this investment was worth £15,000 when you sold it, you have lost £5,000. This £5,000 can be used to offset the profit of £20,000, so that tax is only payable on £15,000 if the investments were both sold within the same tax year.
You need to report how much you have made if it exceeds the amount you are permitted each year, which means you’ll need to calculate it each year. If you complete a Self Assessment Tax Return for any reason, you’ll also need to report it every year.
Although this may not seem a big deal when you start investing because your profit isn’t likely to exceed the amount allowed before tax is due, the idea is to invest and grow your money over the long term. So you might have no chance of exceeding your annual allowance in the short term, but 30 years from now it could be quite expensive!
I haven’t included the Capital Gains Tax allowance in this article as it is subject to change, but more information can be found here.
Just like with your wage or with interest payments, any dividends you receive will be subject to income tax. Again, you have an allowance that you can receive before you need to pay tax.
Check out the government website for more information on the allowance for dividends.
Tax efficient investing- Stocks and Shares ISAs
I do all my investing in a stocks and shares ISA. They are not quite tax free but any tax due is taxed at source before it reaches you.
However, any gain you make or dividend payment made to you is tax free and doesn’t need to be reported anywhere.
This takes away the headache of tax, as long as you’re investing below your annual ISA allowance. In my opinion this is a brilliant arguement for starting small sooner, rather than waiting until you have larger sums to invest later.
For the 2016/17 tax year, you can invest up to £15,240 in ISAs, and for the 2016/17 tax year, you can invest up to £20,000 in ISAs.
You can invest in the majority of individual stocks and shares, funds, gilts, bonds and etfs within an ISA.