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How are Investments Taxed in the UK [incl. Crypto]
Whether you are investing in crypto, stocks, or any other asset class, it's fundamental to be aware of your tax obligations. Failure to do so can result in HM Revenue & Customs (HMRC) charging you a penalty fine, and what's more, these fines can accrue interest on the outstanding amount if obligations haven't been met on time. In some rare cases, HMRC may even prosecute; depending upon the amount of tax payments withheld.
The good news is that the UK has a straightforward tax system that most people should be able to follow without too much difficulty, and the UK government has released many easy-to-follow articles to further help. But going through all of these may take a while, and prove inconvenient for some.
This article will therefore seek to collate the most useful tax information for UK investors, including crypto tax obligations in the UK.
Let's get right into it!
What Constitutes an Investment?
In order to answer the overarching question, it's perhaps best to first identify what constitutes an investment.
Put simply, an investment occurs when you put money (capital) into something in order to have an additional income; or for the purpose of generating profit. So whether it be purchasing stocks and shares from a UK broker, investing in government bonds, buying real estate, or buying cryptocurrencies on platforms like ICONOMI, you will technically be making an investment.
Do You Pay Tax on Investments in the UK?
The answer is yes.
When it comes to taxes on investments in the UK, there are three types of taxes you may need to think about:
Now the question at hand — do you pay tax on investments if you are a UK citizen?
1) Income Tax
This is the tax imposed by the UK government on income, and is what most people will see on their pay slips at the end of each month.
Currently for the tax year 2023-24, the basic rate of income tax is 20% on income up to £50,270. Anything above this threshold will be taxed at a higher rate of 40% on income between £50,271 and £125,140, and an additional rate of 45% will take effect on any earnings surpassing £125,141.It is important to note that UK taxpayers also have a personal allowance of 0% for any amount up to 12,570.
2) Capital Gains Tax
This government tax is imposed on anything that has been sold for more than the price of purchase (i.e making a profit, capital gain).As of right now for the tax year 2023-24, the UK Capital Gains Tax rates are 10% for basic rate taxpayers (18% on residential property), and 20% for higher and additional rate taxpayers; with gains on residential property being taxed at 28%.
3) Dividend Tax
Dividend tax is a tax on income received from owning shares in companies, and the rate at which dividends are taxed depends on the individual's income tax band. As of right now, for the tax year 2023-24, the dividend tax rates in the UK are 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers.
When Do You Pay Tax in the UK?
If you have made investments, and meet the criteria above, then you will need to pay tax.
The timing of when you pay tax in the UK depends on the specific type of tax you owe:
Income Tax 2023-24 (Deadline)
This is typically deducted automatically from your salary through the Pay As You Earn (PAYE) system. However, if you have income from other sources like investments, you may need to pay your income tax through Self Assessment by midnight on January 31st following the tax year (April 6th - April 5th).
Capital Gains Tax 2023-24 (Deadline)
You generally don't pay capital gains tax until you sell an asset for a profit. You then have 60 days to report the gain and pay the tax due through Self Assessment.
Dividend Tax 2023-24 (Deadline)
Similar to capital gains tax, you typically pay dividend tax when you receive a dividend payment. The tax is usually deducted automatically by the company paying the dividend and reflected in the amount you receive. However, you may still need to report it on your Self Assessment tax return, especially if you fall into a higher tax bracket.
Corporation Tax 2023-24 (Deadline)
If you are a business and have made investments, then Corporation Tax is typically payable nine months and one day after the end of your accounting period.
In terms of paying tax, you can either submit a tax return yourself, or hire an accountant to do one in your stead.
Tax Allowances For Investments
While it's crucial to be aware of your tax obligations, it is also equally useful to be aware of any tax allowances that may apply to investments conducted in the UK.
Below are some tax allowance avenues that can be used to reduce tax on investments:
Personal Savings Allowance (PSA)
Introduced in April 2016, this allows basic rate taxpayers to earn up to £1,000 in savings income tax-free, while higher rate taxpayers can earn up to £500 in savings income without paying tax.
The PSA applies to interest earned on savings and investments, including but not limited to bank and building society accounts, savings and credit union accounts, and some types of investment income such as corporate bonds and peer-to-peer lending interest. It does not apply to dividend income, which is taxed differently.
Individual Savings Accounts (ISAs)
Individual Savings Accounts (ISAs) in the UK are a highly effective way to reduce tax on investments, offering a tax-efficient shelter for your money.
Any gains from investments held within an ISA are free from UK tax. This means you don't have to pay Capital Gains Tax on profits made from the sale of investments within your ISA, nor do you pay any tax on interest earned from cash savings or income from dividends.
Starting April 2024, ISA rules will become more flexible, allowing savers to easily move between different providers to seek higher returns. Additionally, the range of investments eligible for Innovative Finance ISAs will be expanded, providing more opportunities for tax-efficient saving.
Capital Gains Allowance
Previously, individuals had a CGT allowance of £12,300, meaning you could gain this amount tax-free. However, as of right now, this allowance has been significantly reduced to £6,000 and will be reduced further to £3,000 from 6 April 2024.
Transfers between spouses or civil partners are CGT-free. This allows for strategic selling of assets to use both individuals' allowances, effectively doubling the tax-free gains the couple can realise each year.
Plan the sale of assets to maximise use of the CGT allowance across multiple tax years. If large gains are expected, consider spreading sales over two or more tax years to utilize the annual exempt amount fully each year.
Dividend Allowance
For the 2023/24 tax year, the dividend allowance is £2,000, allowing you to earn this amount in dividends tax-free. This will be halved to £1,000 from April 2024 and further reduced to £500 from April 2025. You can use this allowance to receive some dividend income without increasing your tax bill.
If you're close to exceeding your dividend allowance, consider spreading investments between you and your spouse or civil partner to utilise both allowances fully.
You can also diversify your investment portfolio between growth (capital gains) and income (dividends) generating assets to make full use of both CGT and dividend allowances.
Do You Pay Tax on Crypto Gains in the UK?
Given how crypto is one of the most sought-after investment asset classes today, naturally UK investors will be wondering if they have to pay tax.The answer is yes.
Crypto gains are indeed taxed in the UK, and are in line with HMRC's guidance on digital currencies. So whether you are investing, trading, or making yield on your crypto, UK investors may have to deal with both Capital Gains and Income Tax implications.
Additionally, those conducting activities such as mining, or receiving crypto as payment for their work are liable to Income Tax. Therefore, it's important for UK crypto investors to use their CGT allowance effectively, and report their crypto transactions accurately to avoid penalties.
For more precise guidance, consider checking out HMRC's detailed documentation, or consulting with a UK crypto tax specialist.
Conclusion
You now have everything you need in order to see whether you need to pay tax on your investments.
As was shown in this article, understanding the implications of Income Tax, Capital Gains Tax, and Dividend Tax is crucial to optimising your investment returns, and staying compliant with HMRC. By using allowances and structuring your portfolio wisely, you can significantly mitigate your tax liabilities.
But if you want more peace of mind, consider professional advice for a tailored approach for navigating the UK's clear yet complex tax framework.
Stay ahead of the curve by attending to your tax obligations, and the earlier the better.
Best of luck!
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