Investments and taxation – Tax brackets and tax rules

Read on to learn more about investments and the amount of tax you may have to pay.

Is my investment taxable?

Most of us are used to paying income tax on our employment income. But you may also have to pay tax on any earnings or investment income, depending on how you receive it and how much you have earned. The amount of investment tax you pay also depends on your overall income from wages and other sources.

What type of tax do I have to pay on my investments?

There are two main types of taxes that you may have to pay on your investments.

Income tax The first is income tax, and this includes tax on interest earned on savings and any money received from stock dividends.

Capital gains tax The second type of tax is called capital gains tax, and you may be required to pay it when you just sell an asset. In other words, investments made for capital growth have tax implications because these gains (also called profits) may be subject to capital gains tax (CGT).

Do I have to pay the same tax rate on all of my investments?

Not all investment income is taxed at the same rate; there are specific rules, duties, and tax breaks that you should be aware of if you are considering investing.

There are also a number of investment options that are tax-free, providing a tax-efficient way to invest.

Here is a list of taxable investment income:

When do I have to pay tax on my investment income?

There are a number of tax-free allowances to which every adult in the UK is entitled.

These allowances were put in place by the government to encourage people to save and invest. A number of these allowances have been introduced in recent years. These are the personal savings allowance and the dividend allowance. Both are affected by the amount of income tax you are required to pay and the tax bracket in which you fall.

Tax brackets and income tax brackets explained

How does my investment income affect my tax rate?

You are allowed to earn a certain amount of money tax-free, called your tax allowance. Beyond this threshold, you will start paying taxes. In the 2020-2021 tax year, the tax-free allowance for each adult is £ 12,500.

Income tax rate

  • You pay 20% basic tax on any income between your personal allowance and £ 50,000

  • You pay a 40% higher tax rate on any income over £ 50,001

  • You pay 45% additional tax on any income over £ 150,000

Income tax is progressive, the higher your income, the more taxes you pay.

If an investment gives you income rather than capital growth (this is any increase in the original amount you invested, after fees, charges, and amortization), then the income tax rules apply. apply.

Thus, the withdrawal of your pension (through an annuity or other similar product) will be taxed at your income tax rate. Rental income from the rental of “residential” property – the profit from your rental property after qualifying deductions – will also be taxed in this way.

What is the personal savings allowance?

The Personal Savings Allowance (PSA) is the amount of money you can earn in interest on savings accounts, before you have to pay taxes on them. In the 2020-2021 tax year, this allowance is £ 1,000 if you are a base rate taxpayer.

In other words, you can earn up to £ 1,000 on your savings before you have to pay taxes. For most people, this is a pretty large allowance because interest rates are currently low and the amount of interest paid by banks and building societies is low.

For higher rate taxpayers the allowance drops to just £ 500 per year, and for people paying an additional tax rate the PSA drops to zero.

What is the dividend allowance?

The dividend allowance is the amount of dividends you can earn on stocks and shares in a tax year before you have to pay additional tax. In the 2020 to 2021 tax year, the dividend allowance for each adult person is £ 2,000.

What is a dividend and how is it taxed?

A dividend is a portion of the company’s profits that goes to shareholders – the dividend is calculated per share, so the more shares you own, the more money you get.

Dividends are subject to income tax if you earn more than £ 2,000 in dividends in a single fiscal year. If your dividend income exceeds the annual dividend allowance, you pay tax at the following rates on any income above this threshold:

  • If you are a base rate taxpayer, you pay 7.5% tax

  • If you are a higher rate taxpayer, you pay 32.5% tax

  • If you are an additional rate taxpayer, you pay 38.1% tax

An exception to these tax rules is any income from savings or dividends generated in an Individual Savings Account (ISA). This includes ISAs that were previously PEPs under the old rules. All income, dividends, and gains made within an ISA are tax exempt, making it an ideal savings vehicle if you want to lower your potential tax bill.

What is the capital gains tax allowance and how much is it worth?

When you sell an asset – a property, stocks, or other valuable item – and make a profit from it, you are said to have realized a capital gain. When you earn more than a certain level, you may have to pay taxes on those profits.

The capital gains tax abatement is the amount of profit that you are allowed to make in a single tax year without having to pay tax. The Capital Gains Tax Abatement (CGT) for the 2020 to 2021 tax year is £ 12,300.

How is capital gains tax (CGT) invoiced?

If you have an asset for more money than you bought it, you are said to have made a capital gain or, in more colloquial terms, a profit.

There are a number of assets that are not subject to capital gains tax. For example, you pay no CGT when you sell your primary residence, regardless of the profit you make. Capital gains tax may apply to the sale of property / assets purchased as an investment and to the disposal of certain stocks and shares.

If you sold certain stocks at a loss during the tax year, you can offset this loss against any gains you may have made.

How is investment tax paid?

How you pay tax on your investment income depends on your tax bracket and the type of investment in question.

In the case of capital gains tax, this is only payable after your tax return has been submitted and your tax liability has been calculated by your tax advisor or HM Revenue & Customs ( HMRC).

It is important to plan your tax bill when you receive money from your investments.

Children’s savings and taxation

Children also receive a personal savings allowance of £ 1,000 per tax year.

If the investments are held in a Child Trust Fund (CTF) or Junior ISA (JISA) then there is no additional tax to pay. Like regular adult ISAs, all investments and savings within a Junior ISA or Child Trust Fund grow without income tax or capital gains tax.

How will the tax affect the return on your investment?

When deciding where to invest your money, you should take into account the tax implications of each product, depending on your personal situation, in order to make a true judgment on the returns you are likely to generate.

Tax levels are reviewed annually. You can view the most recent tax information from HM Revenue & Customs or speak to a qualified tax advisor.

Read more …

About Madeline Dennis

Check Also

Opening of the self-service DMV kiosk

A new alternative to queuing up at the DMV for your annual vehicle registration payments …