Thinking of diving into the world of investment? You’re not alone. Many people now use platforms that make trading accessible without needing a personal broker. Thanks to copy trading, you can even mirror expert moves automatically. While these traders might help you profit, they can’t assist with the tax implications of your share profits.
Understanding Tax on Shares in the UK
Yes, profits from trading stocks and shares are subject to taxation in the UK. Two types of tax could apply to your share trading activities:
- Capital Gains Tax (CGT)
- Dividend Tax
Capital Gains Tax on Shares Explained
Capital Gains Tax is levied on the profits you make when selling shares. For instance, if you bought shares for £10,000 and sold them later for £30,000, you’ve made a capital gain of £20,000 (excluding fees for simplicity).
As of the 2023/2024 tax year, everyone in the UK has an annual CGT allowance of £6,000. This means you can make profits from selling shares (and other assets) up to £6,000 without paying tax. Any amount above this is subject to CGT.
You might also like to read our related blog, 5 Tips to Keep Your Capital Gains Tax as Low as Legally Possible.
How Much CGT Do You Pay on Shares?
The rate of CGT you pay on profits above the allowance depends on your income tax band:
- Basic rate taxpayers: 10%
- Higher or additional rate taxpayers: 20%
Using our £20,000 profit example, after the £6,000 allowance, you’d pay tax on £14,000. Depending on your tax band, this could result in a tax bill of £1,400 or £2,800.
Understanding Dividend Tax on Shares
Dividends are payments made by companies to their shareholders. Not all companies offer dividends, as some reinvest profits. However, if you receive dividend payments, they’re subject to Dividend Tax.
How Much Tax Do You Pay on Share Dividends?
For the 2023/2024 tax year, there’s a dividend allowance of £1,000. Dividend income above this allowance is taxed at the following rates:
- Basic rate taxpayers: 8.75%
- Higher rate taxpayers: 33.75%
- Additional rate taxpayers: 39.35%
For example, if you received £3,000 in dividends, £2,000 would be taxable. Depending on your tax band, you could pay £175, £675, or £787 in Dividend Tax.
When Do You Need to Pay Tax on Shares?
You only pay CGT in the tax year you sell shares for a profit. Dividend Tax applies in the tax year you receive the dividend payment.
How to Reduce Your Tax on Shares
There are legal ways to reduce your tax liability on investment profits potentially:
- Use a stocks and shares ISA
- Contribute to a Self-Invested Personal Pension (SIPP)
- Make use of your annual CGT and dividend allowances
Need Help with Share Trading Taxes?
Navigating the world of share trading taxes can be complex. At Yorkshire Accounting, we help you understand your tax obligations and explore potential ways to reduce your liability.
Don’t let tax concerns keep you from investing. Contact our expert team today for personalized advice tailored to your investment strategy and financial goals.
