Transcription
Everything that you need to know about UK tax when it comes to investing. In this video, I'll go through all of the different types of taxes you may have to pay as an investor, and also a way how you can potentially avoid them completely.
But before we get into that, a very brief disclaimer. I am not a qualified Tax Advisor or accountant, so do not take any of this as financial advice. I am purely just a guy on the internet that is sharing information that is already out there. If you do want any professional advice, do seek a qualified accountant. And also, any information shared in this video is accurate at the time of recording. Things may change in the future.
But now that's out the way, let's talk about the first tax you may have to pay on your investments, which is capital gains. Basically, all this is, is the tax that you will pay when you sell an asset and you make a profit from it. In terms of what counts as an asset from capital gains, the main ones are property, shares, business assets, and crypto. So, for example, let's say if you bought Microsoft shares for £1,000 and then one year later you sell them for £1,500, you have made a capital gain of £500, which may be subject to tax.
However, one thing to note is that in the UK, we do currently have an allowance for capital gains tax called the annual exempt amount, and this is currently set at £3,000 for the 24/25 tax year and is expected to stay the same for the next year to come. This allowance did actually use to be much higher in previous years, but recently it's been halved by the government, which is a little bit of a shame. But with that said, if your capital gains for the year are less than the current £3,000 allowance, you won't need to pay any tax on them.
However, if it does exceed this amount, you may need to pay some tax, and how much you pay is all dependent on your current tax rate for your income. And with this, there are two tax rates that you may fall into. You have the basic rate, and then you have the higher or additional rate. What I've done is put them on screen for you to work out where you stand. But essentially, if your ordinary income is between £12,571 and £50,270, you'll fall into the basic rate. But if it's higher than this, then you'll be on that higher rate.
One really important thing to remember though, is that all of this only counts when you actually sell your assets, set for cash. If you have an investment that is showing as a profit, but you haven't sold it yet, this is counted as an unrealized gain, as it's still an active investment.
Now, the next tax that you may be liable for is dividend tax. This is a tax that you may have to pay on any dividends you receive from your investments, and this will be taxed slightly differently from any tax on your income and capital gains. This tax also has an allowance that has also been massively reduced in recent years again, but as of right now, the annual dividend allowance is £500. So if your yearly total dividends paid to you is less than this, you won't need to pay any tax on that income.
But once again, if it does exceed this amount, dividend tax is payable at increasing rates, once again based on your total annual earnings from all sources. I'll put all of the bands and the rates on screen for you to find out where you sit within this. But essentially, that's the main two taxes that you'll pay: capital gains and dividends.
There is, however, one more tax that you may have to pay before you even buy an asset, which is stamp duty. And I'm sure you've already heard of this when it comes to buying a house, but it also does apply to some shares as well. Personally, I think it's an absolutely terrible tax, but I'm sure somebody will have an argument as to how it benefits the country. But regardless, this is a tax that you have to pay when it comes to investing in shares, only if the company you are investing into, however, is incorporated within the UK. And the rate you'll pay is 0.5%.
What I've done is thrown an example on the screen on how much you would pay if you invested £1,000 into Lloyds, which is a UK company. And as you can see, it's not that much in this case, but it is worth considering that things like this will add up if you are planning to invest in the tens of thousands.
Now, you might be sat there thinking, this all just seems like a bit of a waste of time with the amount of tax you may have to consider. But there is actually a way that you can avoid paying both capital gains and dividend tax altogether, and that is investing within a stocks and shares ISA. And what this is, is a special tax-saving account where you can actually add up to £20,000 a year, and any capital gains or dividend gains that you make within it, you will not be liable to pay any tax on, no matter how much you make.
So, for example, you could invest, let's say £20,000 into Apple stock within a stocks and shares ISA, hold that investment for let's say 20 years, and let's say you sold it for £200,000 20 years later. All of that profit and the dividends that you have paid along the way is 100% yours to keep.
To be able to open a stocks and shares ISA, you will need to do this within an investment broker. I recommend checking out Trading 212, as it's best for beginners. They have a stocks and shares ISA account option, and you can also get a free share worth up to £100 upon signing up using my link. I'll leave that in the description down below. But remember, your capital is always at risk.
But with that said, these are the taxes that you're expected to pay as a UK investor. Remember to stay up to date with any changes in the allowances and rates that you'll pay, and I'll see you in the next one.