Those who invest are probably reasonably financially savvy, so if you’re amongst them, the chances are you’re already aware that you may have tax to pay on your investments.
Despite this, you’re unlikely to know the exact rules that govern what you owe off the bat, which is why our brief guide to calculating costs has been specially designed to help you.
Personal Savings Allowance
We’ll start be exploring the rules surrounding your Personal Savings Allowance (PSA).
Although banks and building societies will not deduct tax from any interest they pay to you on your savings, this money will still be counted as taxable income.
This is where your PSA comes in. It means that basic rate taxpayers need not pay any tax on the first £1,000 of profit, whilst the same rule will apply to higher rate taxpayers for the first £500. Additional rate taxpayers are not eligible for relief.
This allowance exists in addition to any savings rate band that’s available.
Capital Gains Tax
It’s also important to be aware of the rules regarding Capital Gains Tax.
These allow you to make a set amount of annual gains from selling investments before you have to pay.
The tax-free allowance for 2017 is set at £11,300.
ISAs carry some of the greatest tax benefits of any investment.
Allowing you to invest £20,000 for 2017/2018 in cash, stocks or shares, or a combination of the two, they do not require you to pay tax on any income you receive from these investments.
Hooray for ISAs.
Unit trust and Open-ended Investment companies (OEICs)
If you invest in unit trusts or OEICs, the taxation situation is a little harder to understand. For funds that pay dividends, you will not need to pay tax on the first £5,000 of your dividend income for the tax year. However, for any income over this, it must be paid at the following rates:
• 7.5 per cent within the basic rate band.
• 32.5 per cent within the higher rate band.
• 38.1 per cent within the additional rate band.
Where one of the above funds instead pays interest, Personal Savings Allowance rules apply.
The rules governing life assurance bonds are also worth brushing up on, as they differ from other UK-based investments because they’re non-income producing. They are subject to something known as Life Fund Taxation, which means that individuals are treated as if they’ve paid basic rate tax on their gains.
Each year, individuals will have the chance to withdraw up to five percent of the amount paid into their bond, with no requirement to pay immediate tax on it. Any unused part of this limit is carried forward, which means that higher and additional rate taxpayers whose taxation status may change can defer these withdrawals until this time, in effect ensuring that they needn’t pay tax on their gains at all.
Further information on taxation can be found on the Government website.
What About if I Receive a Bonus?
If you’ve had a bonus payment from your workplace, read this article about how tax is worked out.