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.

Young casual man and girl using laptop while looking at invoice and plan the budget to save.

Image source: Getty Images

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.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

[top_pitch]

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.

[middle_pitch]

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 gov.uk 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 gov.uk 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.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »