Posted: 24. November 2019 by: Rupert Tennant

How Investments are taxed

As soon as you’re able to put some money aside, you should try to make it into something more than just savings and make sure you have a passive income source. The most common way to do it is to invest your savings in stocks.

That’s because it allows you for quite a lot of diversity regarding where you are investing. This isn’t something you need to get into personally since there are brokers to do that for you for a fee.

Income tax

The first tax concern you should have in regards to this additional income is obviously income tax. That’s the tax on the income you make from your investments, and it’s paid like any other income such as salary or rent. This applies to companies’ investments but not in stocks or ISAs since they are excluded from the income tax.

The tax is paid on the progressive rate, and all of your income, not just the income coming from the savings, is included in calculating your tax base and thus your rate as well.

Capital gains tax

Capital gains tax is the tax that you pay on the income from investing. There’s an allowance of £11.300. After that, you start paying the tax, and the rate you pay depends on your rate on your basic income tax. Those who pay a basic tax rate also pay ten percent on their capital gains tax, and those who pay a higher tax rate on their income pay 20 percent on capital gains.

Those who make their income by investing in stocks and ISA funds don’t pay this tax. The logic behind the rates is to encourage investment by lowering taxes.

Dividend tax

Dividends are often confused with stocks, but they are not the same thing. Both are investments in companies with which you own a percentage of the company. The income is then made from the percentage of the company’s income. This is not the same as share since the income isn’t made by selling your portion.

The tax paid on dividends’ income also depends on the rate you fall under with your ordinary income. It goes as following:

-For those who pay a basic rate, the tax is 7.5 percent
-For those who pay a higher rate, it’s 35.5 percent
-For those who pay an additional rate, it’s 38.1 percent

Stamp duty on shares

There’s a particular case in which you’ll need to pay one more tax on buying and investing in shares. It’s not a large amount, but it’s often overlooked, and it can come as a surprise for those who aren’t aware of it. It’s paid when you use a paper stock transfer form, and it’s called stamp duty.

The tax is set at 0.5 percent of the value of the stock purchased in this manner. However, there’s also an allowance of £1.000, meaning that you start paying only if your stocks are worth more than that.

How to choose?

It’s important to keep in mind that even though the tax is an important part of your expenses, it shouldn’t be the only reason you choose where to invest. This should be done based on how much you can earn from it, at what period of time, and most importantly, what you’re investing into.

You’re investing in a company and not in the profit that it brings. That means that it should be a company that has an opportunity to grow, and that has a product or service that you want to support.

Accounting

There’s also an issue of paying the taxes on this income, and that means that you should consider the person who will handle that for you. If you have your own accountant, they could take on those roles as well. However, there’s also an option of a broker doing this for you for a fee.

It’s up to you to choose the option you want. It should be based on the quality of the accounting work they can provide and the price of the accounting job. That can sometimes bite into your bottom line.

Conclusion

Investing is the best way to use your extra income since that way, you can get some passive earnings from the money you’ve put aside.  There are more than a few ways to invest, and the type of investment that you make will affect how your income made from that investment is taxed.

For the most part, the amount you’ll pay depends on how much you’ll pay for your ordinary income tax. That doesn’t mean that the rates are the same, they are lower, but the rates follow those for the ordinary income.