Are shares taxable?

Does investing success have to equate to higher taxes over the long run?

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Looking to reduce the amount of tax you pay on your shares? You’re not alone, since few people like paying taxes.

However, when you invest in shares using a standard share-dealing account, capital gains may be taxed above a specific threshold, while dividends received may also be subject to dividend tax under recently revised rules.

However, it is possible to significantly reduce the amount of tax paid on capital gains and income from shares. A variety of products that are simple to use and very accessible could provide a boost to an investor’s net profit over the long run. Here are a number of examples that could be worth considering today.

What taxes are payable on shares?

Capital gains tax

If you purchase shares in a company and later sell them at a profit, you may need to pay capital gains tax. Gains above the annual capital gains tax allowance of £12,000 are subject to tax. Capital gains tax is levied at either 10% or 20%, depending on whether the individual concerned is a basic rate or higher rate taxpayer. 

For example, if an investor bought shares worth £5,000 and then sold them for £20,000, that would be a £15,000 gain. However, only £3,000 of that amount would be a taxable gain, since the annual allowance of £12,000 would first need to be deducted. Capital gains tax of £300 or £600 would be due, depending on whether it was charged at the basic or higher rate.

Dividend tax

Dividends received may also be subject to tax. Only dividends received above the dividend allowance of £2,000 per person per tax year are subject to tax. The rate of dividend tax is 7.5% for a basic rate taxpayer, or 32.5% for a higher rate taxpayer. 

For example, if an investor receives dividends of £3,500 in a tax year, dividend tax of either £112.50 or £487.50 would be payable, depending on whether that person is a basic or higher rate taxpayer. Only £1,500 of the amount received in this example would be subject to tax, since the annual allowance of £2,000 would first be deducted.

Reducing the tax payable on shares

You might think that the allowances for capital gains tax and dividend tax are high enough to exclude many investors from paying tax in the short run. However, in the long run, shares can deliver high returns. Many investors may find that they are liable for capital gains tax or dividend tax in their lifetime.

So, is it possible to reduce the tax payable on shares?

The answer is yes, it may be possible to utilise products such as an ISA (Individual Savings Account) or a SIPP (Self-Invested Personal Pension) to reduce the tax on shares.

A stocks and shares ISA allows an individual to invest up to £20,000 in shares per year, with no capital gains tax or dividend tax being payable. There is also no tax paid on withdrawals, since amounts contributed to ISAs are from post-tax income. ISAs are similar to standard share-dealing accounts in terms of how they are opened, while their charges are generally low. This makes them accessible to a wide range of investors.

A SIPP also offers significant tax benefits. It can be opened online and used to purchase a variety of shares. Contributions to a SIPP are made before income tax is paid, with the government crediting the value of that tax and adding it to the SIPP. This means that a SIPP may grow faster than an ISA or a share-dealing account. Amounts invested within a SIPP are also not subject to capital gains tax or dividend tax. However, 75% of withdrawals made from a SIPP are subject to income tax at an individual’s normal rate of tax. The other 25% of withdrawals are tax free.

Verdict

The tax due on shares held in a standard share-dealing account can be surprisingly high in the long run – especially if an investor enjoys a degree of success. Therefore, avoiding tax by utilising tax-efficient products such as ISAs or SIPPs could help boost long-term returns and improve an individual’s financial position.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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