How are my investments taxed?

If you’re looking to secure bigger returns than can be achieved in the cash savings market, investing could be a great way to go. Though it doesn’t come without its risks – there are no guarantees and you may end up with less than you put in – and there are differences to be aware of when it comes to tax as well. So, here’s everything you need to know about how your investments are taxed.

In short, yes. However, the amount of tax you’ll have to pay will depend on various factors including your other taxable income, the amount you’re investing and what you’re investing in, and there are various allowances and thresholds which can make your holdings more tax-efficient. These include your personal allowance, capital gains tax allowance and dividend allowance, and you may be able to mitigate some of your tax liability by utilising them effectively.

Tax is typically paid on the value of any gains (or profit) that you realise, rather than the value of your holding, though you may also have to pay tax on any transactions you make in a share account. It can be complicated to work out – particularly when the various allowances are factored in – and you’ll normally need to declare any tax liability through your annual self-assessment tax return. The complexity means that it’s often best to speak to an independent financial adviser who’ll be able to help you navigate things.

We’ll look at three core types of investment account– a general investment account, stocks & shares ISA and self-invested personal pension (SIPP), which can all be opened and managed via an investment platform. You can have more than one open at the same time and can reap different benefits accordingly, but they also have different tax liabilities. Let’s take a look at each.

A general investment account is the most common, and arguably most flexible, type of investment account available. You’ll be able to invest in a range of tradeable assets and there’s no limit to the amount you can invest each year, though any gains can be taxable, which means you may be subject to capital gains or dividend tax if you exceed your allowances.

A stocks and shares ISA (S&S ISA) is one of the most tax-efficient methods of investing. Essentially, it’s a tax-free “wrapper” that shields any investments held within it from tax, though there are some limitations in terms of what assets you can invest in, and the amount you can invest each year (£20,000 for the current tax year). You may also be liable to pay stamp duty on any UK stocks, and dividends can be taxable if they’re from non-UK stocks.

A self-invested personal pension (SIPP) is a pension account where you’re in control of your investments, rather than the more typical default fund options of most workplace pension schemes. You’re free to invest in a range of assets (though what’s allowable may be restricted by your particular pension provider) and, crucially, can benefit from tax relief on your contributions, which are capped at to the higher of 100% of your salary or £60,000 per year. When you take your pension benefits, you can take 25% of the value of the SIPP as a tax-free lump sum, but the remainder is taxable in the same way as income from employment.

Whenever you buy shares there’ll be a tax to pay, calculated at 0.5% of the transaction (though this may rise to 1.5% if those shares are transferred into certain clearance services or depository receipt schemes). This tax is known as stamp duty.

There are two types of stamp duty to be aware of depending on how you buy shares, and the way you pay for it will be different too.

• Any UK shares bought electronically will be liable for stamp duty reserve tax at 0.5%, which is taken automatically when the transaction goes through. This applies no matter the value of shares you’re buying.
• If you buy more than £1,000 of shares using a paper stock transfer form, you’ll be liable for standard stamp duty which is charged at 1.5%, with the amount rounded up to the nearest £5. You’ll need to send your stock transfer form to HMRC, along with your tax payment, within 30 days of the transaction.

Stamp duty still applies even if you’re buying shares through a S&S ISA or SIPP. However, there are certain situations in which you won’t have to pay it (such as if you’re given the shares for free or if you buy overseas shares), or if you’re buying shares quoted on certain markets such as the Alternative Investments Market, and if the transaction is offline, you won’t have to pay tax if the value is below £1,000. Also, if you invest via authorised investment funds, either within or outside of an ISA, you will not need to pay stamp duty directly, but this will be included in the investment managers fees.

There may be tax to pay when you sell shares too, based on the amount you gain (or profit) from the sale. This is known as capital gains tax.   

Capital gains tax (CGT) is charged whenever you sell or dispose of any chargeable assets (including shares or other investments, such as gold) and make a profit on it. Higher rate taxpayers will be charged 20% CGT on gains from any chargeable assets and 24% on gains from residential property (not the sale of your main residence), while basic rate taxpayers will pay 10% and 18% respectively.

However, there are exceptions – namely any gains within an ISA or registered pension scheme, lottery wins, UK gilts or Premium Bonds – and you’ve also got a capital gains tax allowance to use up before the tax kicks in. This is set at £3,000 for the 2024/25 tax year. You’ll also need to take into account your standard personal allowance and any other income tax reliefs you may be entitled to.  

There are various tax reliefs that can be used to reduce the amount of CGT you may be liable for, including entrepreneur’s relief, gift hold-over relief, rollover relief or any gains made as a result of investments through the enterprise investment scheme (EIS) or seed enterprise investment scheme (SEIS).

If you own shares in a company, you may receive dividends, which are a form of profit paid to shareholders and are taxed as income rather than capital gains. However, you get a dividend tax allowance which can mitigate your liability.

From 6 April 2024 you have a £500 tax-free allowance for dividend income, after which the amount of tax you pay will be based on your income tax band. For 2024/25, basic rate taxpayers will face a 8.75% tax charge on dividends, which rises to 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. 

Dividend tax is payable by the January after the tax year in which it was received. If your dividend payments are £10,000 or below, you may be able to ask HMRC to change your tax code so the tax is taken from your wages or pension, or you may simply need to include it in your self-assessment tax return if you fill one in. If you earn over £10,000 in dividends in any tax year, you can only pay it via self-assessment.

The personal savings allowance is the amount you can earn in interest in any tax year before you’ll be taxed on the income. Basic rate taxpayers get a personal savings allowance of £1,000, which falls to £500 for higher rate taxpayers, and additional rate taxpayers don’t get any. Any income you take from fixed interest investments, such as corporate bonds or gilts or from a non-pension annuity, counts towards your personal savings allowance.

The only investments that grow truly tax-free are those held within an ISA or personal pension (including a SIPP), though even here there may be some caveats. That said, investments held elsewhere may benefit from some of the aforementioned allowances before they become taxable.

In order to make your savings and investments as tax-efficient as possible, it’s worth taking a close look at where everything’s held, and perhaps moving some funds around if you could better utilise your allowances. For example, many investors like to start with a stocks and shares ISA to maximise their tax-efficiency, moving to a general investment account once they’ve used up their allowance.

Yet it isn’t always an easy decision, and remember that cashing in any investments that aren’t in a tax-free wrapper may leave you liable to capital gains tax, so make sure to proceed with caution. It’s often best to speak to a financial planner who’ll be able to take you through your options and ensure your money is working as hard – and crucially, as tax-efficiently – as possible.