Do you pay tax on investments? Here's how it works, and how to save time and effort

Made some money from your investments? Nice! But depending on how much you've made, you might owe some tax on it.

If you've been buying and selling shares, receiving dividends, or investing overseas, there are a few tax rules to know about. And if you've got investments with several different providers, working out what you owe can get a bit confusing.

So, we've put together this guide to explain how investment taxes work, what you might need to declare to HMRC, and how services like TaxFix¹ can help you sort it all out, so you don’t need to worry too much about calculating everything yourself.

Do you have to pay tax on all your investments?

You might do, but there's a good chance you won’t pay tax on everything, or even any of it.

If all your investments are held in a Stocks & Shares ISA, you don't need to worry about tax on your investment profits or dividends (payments to shareholders from a company’s profit). That's one of the biggest benefits of an ISA. Well the only benefit really, but it’s a great one.

Outside of an ISA, things work a little differently.

There are three main taxes to be aware of:

1. Capital Gains Tax: when you sell investments for a profit.

2. Dividend tax: when you receive dividends from shares or certain investment funds.

3. Income Tax: on interest from savings, bonds and certain investment funds, as well as some foreign income.

And if you've got investments overseas, there can be some additional rules to consider too, but we won’t go into them just now.

You don't necessarily have to pay tax on everything you earn outside of an ISA either. There are tax-free allowances that can reduce what you owe, sometimes to nothing at all. We’ll cover some of these just below.

Capital Gains Tax

Capital Gains Tax (CGT) is a tax on the profit you make when you sell an investment, rather than the total amount you receive.

Let's say you bought £5,000 worth of shares, and a few years later sold them for £9,000. You've made a £4,000 profit, which is your capital gain.

For each tax year, your allowance for Capital Gains Tax is £3,000.

So, assuming you haven't made any other gains or losses, you'd only have to pay tax on £1,000 of that £4,000 profit.

The standard Capital Gains Tax rates on investments and shares are 18% for profits falling within the basic rate band or 24% for profits above the basic rate band (higher rate or additional rate).

‍Note: you might also be able to reduce your taxable gains by deducting allowable losses from other investments.

Confused yet? One thing that's easy to misunderstand is when Capital Gains Tax actually applies. If your investments have increased in value but you haven't sold them, you generally won't owe Capital Gains Tax just because they're worth more. It's normally only when you sell them for a profit.

And if you're buying and selling investments regularly, it's worth keeping a record of everything. Calculating your gains isn't always as simple as subtracting what you originally paid, particularly if you've bought the same shares at different times.

Tax on dividends

Dividends are payments that companies make to their shareholders, usually from their profits.

So, if you own shares in a company that pays dividends, you could receive some extra income without having to sell any of your investments. You can also receive dividends from investment funds.

For each tax year, you can receive up to £500 in dividends tax-free. Anything above that is normally taxable. If you don’t earn a salary, or a low one, you can also use your Personal Allowance (currently £12,570).

Here's how much dividend tax you could pay:

For example, say you've received £1,500 in dividends over the tax year, and you're a basic rate taxpayer earning over £12,570.

The first £500 is covered by your dividend allowance, leaving £1,000 taxable at 10.75%. That's £107.50 in dividend tax.

‍Note: your dividend allowance applies to all your dividends combined, not separately to each investment account, or if you take dividends directly from a company you own and manage directly.

And any dividends received within an ISA don't count towards this allowance, as they're already tax-free.

Income Tax on savings and investments

It's not just your salary that can be subject to Income Tax. You might also have to pay it on money you earn from savings and investments.

For instance, this could include interest from savings accounts, government and corporate bonds, or certain investment funds.

But you don't necessarily have to pay tax on all of it.

Most people typically have something called a Personal Savings Allowance, which lets you earn a certain amount of interest each tax year without paying tax. Yes, that’s outside of an ISA!

Here's how much you can earn tax-free:

So, if you're a basic-rate taxpayer and earn £1,500 in savings interest over the year, you'd normally only pay tax on £500 of it.

And that's charged at your usual Income Tax rate (the same as your salary), which is generally 20%, 40% or 45%, depending on your tax band.

If you're on a lower income, you might also qualify for the starting rate for savings, which could mean earning up to an additional £5,000 in interest tax-free.

Remember, the allowances apply across your savings and relevant investments combined, not separately for each account.

And, just a reminder, if your savings or investments are held within an ISA, you won't have any tax on the money you make, however it’s made.

Do you need to declare savings interest?

Not always. Banks and building societies normally report your interest to HMRC automatically.

If you owe tax, HMRC can often collect it by adjusting your tax code, so you might not need to complete a tax return.

However, if you're already completing a Self Assessment tax return, for instance if you are self-employed or are familiar with taxes on your investments, you'll generally need to include your savings income that would be liable for tax. And if you've earned more than £10,000 in savings interest within a tax year, you'll normally need to complete a tax return.

What about tax on foreign investments?

Investing overseas is pretty common these days. You might own shares in American companies, invest in international funds, or have an investment account with a provider based abroad.

If you're a tax resident in the UK, you'll generally need to consider UK tax on your overseas investment income and gains too.

For example, if you receive dividends from US shares, you may find that some tax has already been deducted before the money reaches your account. But that doesn't necessarily mean there's no UK tax to pay.

The UK has agreements with many countries to help prevent the same income being taxed twice. Depending on your circumstances, you might be able to claim Foreign Tax Credit Relief for tax you've already paid overseas.

It's also worth checking how foreign income should be reported, as the rules can vary depending on the type of investment, your tax residence and any reliefs available to you.

This is one area where we'd consider getting some help, particularly if you've got investments across several countries. More on getting help just below.

Do you need to complete a tax return for your investments?

Not everyone with investments needs to complete a tax return.

If all your investments are in an ISA, you generally won't need to declare the income or gains from them. And even outside an ISA, you might not have anything to report if your income and gains are within the relevant allowances.

However, if you've received taxable dividends, made capital gains, or earned foreign investment income, you may need to tell HMRC. For most people, this means completing a Self Assessment tax return.

There are exceptions. For example, you can sometimes report dividend income directly to HMRC without completing a full tax return.

You might also need to report selling shares even if you don't owe Capital Gains Tax, depending on how much you've sold and whether you're already completing a tax return.

How to declare investment income and gains online

You can complete your Self Assessment tax return yourself through HMRC.

You'll need to gather the relevant information from your investment accounts, including any dividends received, investments sold and overseas income.

For capital gains, you'll also need to work out what you originally paid for your investments, along with any potential allowable costs and losses.

If you've only got one investment account and a handful of transactions, this might be fairly straightforward. But if you've got several accounts, different types of income, or investments overseas, it can take a fair bit of work.

You also need to make sure you're completing the right sections of your tax return and claiming any allowances you're entitled to.

That's where an online tax service can be useful.

Using Taxfix to sort your investment taxes

Taxfix is an online tax return service that helps you complete your Self Assessment tax return without having to work through all the HMRC forms yourself.

You provide the information about your income and investments online, and a qualified accountant prepares and submits your tax return for you. Easy right?

We think this is pretty great, and saves a huge amount of time and effort for a low cost. And it’s particularly great for people who don't have an accountant but don't fancy doing their own tax return either.

Taxfix can help with most investment tax matters, including:

• Dividend income from shares and investment funds.
• Capital gains from selling investments.
• Foreign investment income.
• Relevant tax allowances and tax reliefs.

It's not necessarily something everyone needs. If your investments are all in an ISA, for instance, you probably won't need a tax return just for those investments. But if you do have taxable investment income or gains to report, it's worth considering, especially if you'd rather have an accountant handle the return.

When is the deadline for paying tax?

The UK tax year runs from 6th April to 5th April the following year.

If you need to complete a Self Assessment tax return, the usual deadline for submitting it online is 31st January following the end of the tax year.

For example, if you've made investment gains that you need to pay tax on, during the last tax year, you'll normally need to submit your online return by 31st January following the end of the tax year.

If you've never completed a Self Assessment tax return before, you'll generally need to register by 5th October following the end of the tax year.

We'd recommend getting your investment statements together well before the deadline. It's much easier to work everything out when you're not rushing.

Summary

Investment taxes aren't something you need to worry about too much if you're investing within an ISA. For most people, that's the simplest way to invest tax-efficiently. But don’t stop investing just because you might have hit your ISA limit, you might end up missing out on a big return over time, even if you do end up paying some tax.

If you've got investments outside an ISA, and especially across several accounts or countries, it's worth making sure you're reporting everything correctly.

You can do it yourself through HMRC directly (depending on the type of tax) or through a Self Assessment tax return (most common). However, depending on your investment gains and how confident you are with money and taxes, you might want to opt for a bit of help.

If you'd rather have someone handle the paperwork, Taxfix is well worth a look. Having a qualified accountant prepare your return online could save a huge amount of time and effort, and provide that reassurance that it’s all done properly too.

You might be thinking that’s going to be super expensive, but it’s really not these days. As it’s all online, it’s great value, and well worth considering. You’ll also get a 35% discount with Nuts About Money.

Claim your discount and learn more about TaxFix on the TaxFix website¹.

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This article is general information, not personal tax advice. Your individual circumstances may affect the tax you pay. Tax rules can and do change over time.