How is passive income taxed?

Since HMRC requires you to report your passive income, it might be wise to learn how it is taxed to avoid hefty penalties.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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HMRC requires everyone to report any additional income they earn. Additional income is income that is not related to employee income. If you don’t report this income, it might be perceived that you are evading tax. An example of such an income is passive income. This income is taxed, but not in the same way that employee income is taxed. Here’s what you need to know.

Before we continue, it’s worth noting that tax treatment depends on an individual’s specific circumstances and may be subject to change in the future.

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What is passive income?

Passive income is money earned in ways that don’t require daily effort. You might put in some effort to get these passive income streams up and running initially, but only a little effort is needed to maintain them once they are running.

Common examples of passive income include capital gains, interest, royalties, digital sales, dividends and income from rental properties.

Do you have to report passive income? 

Yes. Failing to report passive income is illegal. HMRC has measures in place to determine when a person is not reporting passive income.

One of the most effective measures is Connect – HMRC’s analytical tool. HMRC feeds taxpayers’ data from different databases (banks, online payment providers, online sales and purchases and government departments and agencies) into Connect.

The goal is to determine whether your declared income matches your lifestyle. Keep in mind that this tool works.


How do I report passive income?

You can report passive income by filling out a self-assessment tax return online or downloading and filling in the main SA100 tax return form.

If you need to fill in more sections, maybe because of different sources of passive income or individual-specific circumstances, supplementary pages may be required. These include SA102, SA103S, SA103F, SA104S, SA104F, SA105, SA106, SA108 and SA109.

With the range of different forms that may be required, it is understandable that there can be confusion when filing a tax return. However, there’s no need to worry. The website offers guidance on how to get help with your tax return. 

If this is your first time filling out a self-assessment tax return, it might be wise to get advice or guidance from an independent accountant.

The steps:

  1. Determine whether you are filing your self-assessment tax return online or sending the SA100 form by post. HMRC recommends filling it online as it arguably has more benefits. If you choose to fill it out online, you have to register.
  2. Read the ‘How to fill in your tax return notes’ booklet that can be found on the website. The notes answer all of the questions you might have and guide you through filling in the different self-assessment tax return form sections.
  3. Fill in the form. If anything doesn’t make sense to you, seek help before continuing to fill in the form.
  4. File your self-assessment tax return before the deadline.
  5. Wait for HMRC to calculate your tax. If you want to have an idea of how much tax you might pay, check the last page of the “How to fill your tax return notes” booklet. There is usually a leaflet with a rough guide to your tax bill.

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