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However, it is the third tax, capital gains tax that concerns people the most. When you sell shares you have to pay tax on the difference between the amount you sold for and the amount you bought the shares for. But it is not all bad news. In each tax year, which runs from April 6 to April 5, you get an exemption for a set amount of gains. For this tax year (2001/02) that limit is £7,500.
That may sound a lot but even if you are only investing small regular amounts for the long-term you will probably reach this level at some point unless you do something about it in advance. The most common way of avoiding capital gains tax is by investing through an ISA that put simply, shelters your investments from both income and capital gains tax. You can find out all about them in our ISA centre.
Naturally you will have to pay for this privilege. The cost of an ISA is another charge you need to consider as an investor. Naturally the lower the better. These days there are a number of cheap self-select ISAs that will allow to buy individual shares very cheaply. Details of these are also in our ISA centre.
It is impossible to know whether the cost of buying shares within an ISA outweighs the capital gains tax you might have to pay several years from now. The amount of income tax you save is fairly minimal and is due to be reduced further in the next few years. Provided that you select a low-cost ISA it makes sense to take advantage of the tax shelter just in case you might need it. Think of it almost as an insurance against tax. It also helps you think long-term as you lose the tax shelter if you withdraw your money from an ISA.
Our tax centre has lots more details on tax if you want to investigate this further, including other ways of minimising capital gains tax.