Investing in stocks and shares is a sensible way of building a financially independent future. Using some of the personal wealth yielded from profitable businesses to invest in the stock market is a good idea to make your money work even harder for you.
In doing so, you will own minute pieces of some of the biggest global conglomerates and well-known brands. Before you go ahead and invest your hard-earned money into the stock markets, it’s important to be mindful of your tax obligations when buying shares, profiting from shares and selling shares.
Stocks and shares are included in your tax-free personal allowance
Every individual in the UK receives an annual tax-free personal allowance. In the 2020/21 tax year it is £12,500. Any money made from your stocks and shares investments will be included in this allowance, on top of additional income e.g. salaries, pensions, rental income.
Any income over £12,500 will be taxed at the basic rate of 20% income tax. Income above £50,000 will be taxed at the higher rate of 40% income tax. In addition, there is an additional rate of 45% income tax for those earning £150,001+ per annum.
Shares and stamp duty
Whenever you purchase shares in a company, you will have to pay stamp duty. It’s not the same stamp duty that you will be familiar with in the UK’s housing market. Instead, stamp duty for shares is fixed at 0.5% of all trades worth more than £1,000. Stock transfer forms must be submitted with HM Revenue and Customs (HMRC) for stamping within 30 days of acquisition.
Buying shares electronically also incurs stamp duty reserve tax (SDRT). This is also fixed at 0.5% of the value of any trade.
Shares and dividend tax
In some cases, the company whose shares you’ve bought may pay out to their shareholders once a year. This is known as a shareholder dividend, which is part of the company’s annual profits. Think of it as a ‘thank you’ for your support.
However, these dividends are also taxed by HMRC above a certain threshold. In the 2020/21 tax year, you have a tax-free dividend allowance of £2,000. How much dividend tax you owe on dividends over this amount depend on whether you are a basic rate, higher rate or additional rate taxpayer. Just add 7.5% income tax on top of your normal income tax band.
Shares and capital gains tax
When the time comes to sell on your stocks and shares, you may also incur capital gains tax (CGT) too. This is the tax on any profits from investments such as shares or property. We all get annual personal allowances for CGT too. In the 2020/21 tax year, you can earn up to £12,300 without paying a penny in CGT to HMRC.
Anything above this is taxed at 10% for basic rate taxpayers and 20% for higher rate taxpayers.
If you are wondering how to buy shares UK tax-free, the simplest way is to open a stocks and shares ISA. This is one of the most tax-efficient investment options, allowing you to grow your funds by investing in one or more portfolios of shares, funds and corporate or government bonds. Crucially, any gains you make above your initial investment are ineligible for capital gains tax (CGT). Nor do you pay any income tax on interest from corporate bonds.
Do note there are alternative charges attached to stocks and shares ISAs. Depending on the platform you use to invest, you will be charged either a flat fee or a percentage of the value of your funds. You may also have to pay a fund manager charge, which is an annual fee for the management of your fund housed within your stocks and shares ISA. Should you choose to move a stocks and shares ISA from one provider to another, you’ll also likely incur a transfer out fee.
Investing for the future is a savvy forward-thinking approach for any young entrepreneur. Just be mindful of the tax implications at all times to keep the taxman onside.