Posted: 26. June 2019 by: Rupert Tennant

How Are Investments Taxed?

When you have enough money to put aside, you should consider investing it instead of just keeping it on a savings account. That way, the money works for you and creates a passive income stream. Once you’re ready to do so, you should take into account that the income made this way will be taxed.

There are 3 ways to tax this income, and it depends on the type and source of the income. You need to contact an accountant before you get into investing and be prepared for this, the largest of expenses, you’ll have.

Income tax

Income tax is usually reserved for ordinary income such as a salary or the income you get from rent. However, there are a few ways you could need to pay income tax, on the income you’ve made from investing. This doesn’t apply to stocks and shares and the earnings made from them.

There are 3 rates you can pay on this tax, and it’s progressive meaning that you pay more as you earn more. The rates are set at 20, 40 and 45 percent, and it’s paid on the pound after the threshold.

Capital gains tax

Capital gains tax is created to be a tax on investments. It’s, therefore, smaller in percentages than the tax paid on income. That way, the government helps investors provide initial funds needed to run a business.  There are only two rates, and they are set at 10 and 20 percent.

This is how most of the investments are taxed and what you think about when you think about investment is mostly covered by this. It’s how income made from shares and stocks are taxed, and it’s how most investment funds are treated as well.

Dividend tax

Dividends are how shareholders are paid the income made by the company they own a percentage of. That is income made by the shareholder, and it’s paid off when once the company has paid all of its expenses, including salaries and taxes on the income made by the company itself.

There are 3 rates for this tax as well, but they are not the same as they are for income tax. They start with 7.5 percent for the lowest of income, but there are two more set at 32.5 and 38.1. The rate depends on what your basic income tax is.

Stamp duty on shares

There’s an additional tax for those who purchase shares. The amount of tax very much depends on how you make this purchase. When you’re using a stock transfer from and when you purchase stocks online, you’ll need to pay this additional tax.

The charge is set at a flat 0.5 percent on any value that you pay for the shares. There’s also an allowance on which you don’t pay this tax, and that’s set at £1.000. If the shares you’ve purchased are worth less than this, you don’t need to pay any stamp duty tax.

Unit trust

There are other ways to invest in shares as well. One of the best of these for you is to invest in a unit trust. It’s a trust that invests in assets of all kinds that focus on the markets in the US UK, and Japan. The key advantage of these trusts is in the fact that they diversify their investments and thus are safer.

It’s often useful to invest via these funds not only because of the diversification but because of the tax benefits as well. The income made via the funds is only taxed when it’s taken out and used.

Savings

Additionally, you might want to diversify your portfolio and place a portion of your funds into savings instead of investing. That’s much less profitable but investing, but it’s a way to make a hedge and keep your investment income safe and secure.

A portion of it should be put into an ISA fund which is the best way to save. There are no taxes on the income made from interest on savings until you decide to withdraw the money and that’s only if you decide to go over the allowance that has been set by HMRC.

Conclusion

When you decide to invest your income, you should consider how it affects your tax obligations, and you’ll need to pay your dues in regards to HMRC. There are 3 main taxes you’ll need to pay on this depending on how you make your income. Those are income tax, capital gains tax, and dividends tax. All of these are progressive taxes that grow as you earn more.

There’s also a stamp duty tax that’s paid on some shares, but it depends on how much you earn and how you make your investment-based income. It’s also important to mix and match these investment methods to get the most out of them.