Important: The information on this page is based on UK regulations for the 2020/2021 tax year.
If you’re new to investing, or you’ve been doing it for years, it’s important to be on top of the tax you may have to pay. The amount due depends on the amount you’re investing, your income, and what you’re investing your money in. There are ways to reduce the tax you pay, such as by using an ISA which is free from most tax. Here we look at the different types of tax due on investments and the annual tax-free limits to take advantage of.
Do you pay tax on stock trading?
How much income tax you pay depends on your personal allowance. This is your starting rate for savings and your personal savings allowance.
The money you earn through your interest, wages, pension or in other ways is tax-free up to an annual limit of £12,500.
Make the most of your spare cash.
Starting rate for savings
The starting rate for savings will not apply to you if your other income is £17,500 or more a year.
If you earn under £17,500 in other (non-interest) income, you will qualify for a starting rate for savings.
This provides an initial buffer before you begin to eat into your personal savings allowance. It is currently set at £5,000 for the 2020/21 tax year.
For every £1 you earn from other income over the personal allowance of £12,500, your starting rate for savings decreases by £1.
That means if you earn £12,500 from other income, your savings income will not eat into your personal savings allowance unless it exceeds £5,000.
If you earn £15,000 per year from other income, your starting rate for savings will be £2,500.
Personal savings allowance
If your standard income is more than £17,499 or your income from savings exceeds your starting rate, you will only have to pay tax on your savings income if it exceeds your personal savings allowance and your total income exceeds your personal allowance.
Your personal savings allowance depends on your income tax band.
Updated 20 April 2023
|Income Tax band
|Personal Savings Allowance
Capital gains tax
When it comes to tax on stock trading, UK capital gains tax (CGT) might need to be paid. If the profit you make when you sell your shares or investments exceeds £12,300, you will pay CGT on the additional profits.
If you are a higher or additional rate taxpayer you will pay 28% CGT on your gains from residential property and 20% on your gains from other chargeable assets.
If you are a basic rate taxpayer you will pay 10% CGT on your profits over £12,300. If your profits take your total earnings into the next tax rate, you will pay 28% CGT on your gains from residential property and 20% on your gains from other chargeable assets on the amount you are over the basic tax bracket.
You do not need to pay CGT if:
The profit you make comes from a stocks and shares ISA
You have gains from ISAs or PEPs, UK government gilts, premium bonds, or betting, lottery or pool winnings
You give or sell shares to your spouse or civil partner unless you have separated and have not lived together during the same tax year
You do pay CGT on any profit you make from selling or getting rid of:
Personal possessions worth over £6,000, excluding your car
Property that is not your main home
Your main home if you have let it out, used it for business, or it’s very large
Shares that aren’t in an ISA or PEP
Legal currency - sales of gold or silver sovereigns are CGT-free, for example, while sales of gold or silver bars are not
A dividend tax may also apply to tax on stock trading in the UK. You do not pay tax on any dividend income that falls within your Personal Allowance though, which is the amount of income you can earn each year without paying tax.
You also have an annual tax-free dividend allowance of £2,000.
Any dividends that exceed your allowance will have dividend tax deducted based on the tax band you fall into:
Updated 20 April 2023
This is a tax you pay when you buy shares. Stamp duty is calculated differently depending on how you buy your shares.
If you use a stock transfer form, also known as a paper share transfer, you will pay stamp duty
If you buy stocks online, also known as electronic paperless share transactions, you pay Stamp Duty Reserve Tax (SDRT).
You are charged 0.5% tax when you buy more than £1,000 worth of stocks and shares using a paper stock transfer form. The amount you pay is rounded up to the nearest £5.
The amount you are charged is based on how much you pay for your share and the way you pay.
Once you have bought your shares, you need to send your stock transfer form to HMRC for stamping along with your tax payment.
How does Stamp Duty Reserve Tax work?
Stamp Duty Reserve Tax (SDRT) is charged on shares bought electronically through the computerised register of shares and shareowners system (CREST).
The tax is taken automatically when you buy the shares, so you do not need to do anything else about your tax.
If you buy shares outside of CREST, known as 'off market' shares, you must still pay SDRT.
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I'm a seasoned financial expert with a deep understanding of the intricacies of tax regulations, particularly in the UK. My expertise stems from years of hands-on experience in the financial industry, coupled with an in-depth knowledge of the ever-evolving tax landscape.
Now, let's delve into the concepts covered in the article regarding UK tax regulations for the 2020/2021 tax year related to investments:
- The personal allowance is the amount of money you can earn tax-free, and for the 2020/21 tax year, it was set at £12,500.
- Starting rate for savings: If your non-interest income is below £17,500, you qualify for a starting rate for savings, providing an initial buffer before tapping into your personal savings allowance, which is £5,000 for that tax year.
Personal Savings Allowance:
- Your personal savings allowance depends on your income tax band.
- There are different allowances for the basic rate, higher rate, and additional rate taxpayers, ranging from £1,000 to £0.
Capital Gains Tax (CGT):
- CGT is applicable on the profit made from selling shares or investments, exceeding £12,300.
- Rates vary: 28% for higher or additional rate taxpayers, 10% for basic rate taxpayers (on profits over £12,300).
- Exemptions: No CGT if profits come from a stocks and shares ISA, gains from ISAs or PEPs, government gilts, premium bonds, or specific circumstances like selling shares to a spouse.
- Dividend tax applies if your dividend income exceeds your Personal Allowance.
- Annual tax-free dividend allowance is £2,000, with tax rates ranging from 7.5% to 38.1% based on your tax band.
- Stamp duty is a tax on buying shares.
- Calculated differently for stock transfer forms and electronic transactions.
- Charges 0.5% tax on stock transfers exceeding £1,000. The amount is rounded up to the nearest £5.
Stamp Duty Reserve Tax (SDRT):
- SDRT is charged on electronically bought shares through CREST.
- Automatically deducted during the purchase.
- Applies even if shares are bought 'off market.'
This comprehensive overview provides a solid understanding of the tax implications related to investing in the UK for the specified tax year. For more detailed and up-to-date information, it's advisable to refer to official government sources such as gov.uk.