Tax is something no one likes to pay, but we are required to, so services such as recycling centres, schools, and the NHS can continue to operate. Everyone pays tax from their day job, but what some people don’t realise is… You have to pay it on your stock market profits as well.
The tax due on gains made from the stock market are split into 2 different categories. Capital Gains Tax, and Dividend Tax. These taxes are submitted through a personal tax return, which the UK Government requires those who hold shares to complete every year.
These taxes are calculated on a percentage of earnings, so Capital Gains tax is either 10% or 20% of your profit depending on your tax bracket. Whereas Dividend tax is 7.5%, 32.5%, or 38.1%, also depending on your tax bracket.
Do I Need to Pay Capital Gains Tax on Stock Market Gains?
The definition laid out by the UK Government and HM Revenue & Customs is as follows:
“You may have to pay Capital Gains Tax if you make a profit (‘gain’) when you sell (or ‘dispose of’) shares or other investments.”HM Revenue & Customs
When you sell shares, no matter if they result in a profit, or a loss, you must complete a Self Assessment, otherwise known as a Personal Tax Return.
The sale of investments that would lead to a personal tax return being required are:
- Shares that are not in an ISA or Personal Equity Plan.
- Units in a Unit Trust.
- Certain Bonds that don’t qualify (Not including Premium Bonds).
Investments that are an exception to this rule are:
- Shares included in a ISA or Personal Equity Plan.
- Shares that are part of a Share Incentive Plan (SIP).
- UK Government gilts (Including Premium Bonds).
- Qualifying Corporate Bonds.
- Employee shares – Issued via bonuses or gifts from an employer.
- You give shares to your husband, wife, civil partner or a charity as a gift.
As mentioned, you only pay tax on your profit made from the investments. However, even if you make a loss, you need to include them on your personal tax return… It can be beneficial to record any losses you make!
Are There any Capital Gains Tax Allowance’s I can Claim?
Yes the good thing with Capital Gains tax is there is a large allowance available to everyone in the UK.
As of the 2020/21 tax year in the UK, investors have a £12,300 capital allowance for any gains made during the year. This means you will have to make a profit of over £12,300 to be at the mercy of paying any tax.
For example, if you buy £10,000 worth of Stock A, then sell it for £12,000 later in life. You will have a £2,000 gains. This amount is well within your capital allowance so you will not pay any tax on the profit.
However, if you buy £10,000 worth of Stock A and £10,000 worth of Stock B. Then you sell both in the same tax year for a total of £25,000. This is a £15,000 gain. So your tax bill would look like this:
- £15,000 gain
- Capital Allowance of £12,300
- Taxable gains of: £15,000 – £12,300 = £2,700
Meaning you would only pay capital gains tax on the £2,700… Not the full £15,000!
How can I calculate my Capital Gains Tax Bill?
It’s relatively easy to calculate your Capital Gains tax bill. You can either use good old fashioned pen and paper, or HMRC’s tax calculator.
The details you will need to calculate your tax bill are:
- Date of asset purchase
- Share value at point of purchase
- Date of asset sale
- Share value at point of sale
- Volume of share hold sold
Note: If you are giving your shares away, you still need to calculate this by using the market value of the shares. Even though no tax will be paid.
The basic equation for working out capital gains tax is:
(Sale proceeds – Purchase price) * Capital gains tax band percentage
Basic’s of Calculating your Capital Gains Tax
Now comes the fun part. Because I’m guessing you have bought multiple shares at different prices. That’s where a table such as this comes in:
|Date of Purchase||Total Shares Bought||Value of Share on Purchase|
|14th Apr 2020||100||@ £35 per share|
|16th Jun 2020||150||@ £34.50 per share|
|16th Jul 2020||150||@ £34.75 per share|
|12th Sep 2020||120||@ £34.55 per share|
From this we can work out your average cost per share:
- Total shares purchased: 52520
- Total cost of shares: £18,033.50
- Average cost per share: £18,033.50 ÷ 520 = £34.68
This is the cost per share you will use when calculating your tax bill. So let’s say you sold all your shares at £45.90 per share:
- 520 Shares sold @ £65.90 = £34,268.00
- Less Cost: £34,268.00 – £18,033.50 = £16,234.5
Your gain for these shares are £16,234.50. Which is above the capital allowance of £12,300. So more calculations are needed:
Your gain £16,234.50 less the capital allowance of £12,300 = £3,934.50. This is your Taxable Gains.
What Tax Bracket are you in?
Depending on which tax bracket you are in, will determine whether you pay 10% or 20% on your capital gain. If you earn more than £50,000 before tax you are in the higher rate tax band.
So for lower rate taxpayers, your capital gains tax bill will be:
- 10% of £3,934.50 = £393.45
And for higher rate taxpayers it will be:
- 20% of £3,934.50 = £786.90
There are some special circumstances that can affect how much tax you pay, which is why I always recommend you contact an accountant like me, or another financial professional before submitting your tax return. You can check the UK Guidance for Special cases of Capital Gains Tax here.
For example, if you purchase and sell shares on the same day, they are classed as a ‘pool’ and can be deemed exempt if they qualify.
What if Earn Dividend Income from my Investment?
Any shareholder that earns dividend from their investment will need to complete a personal tax return to declare the income.
Dividend tax is slightly different to dividend tax, as it can count towards pushing you into a higher tax band. For instance, if you earn £49,000 from your day job, then you get £3,000 of dividend in the same year, you would be pushed into the higher tax band, because your total earnings are above £50,000. Capital Gains tax does not add onto your earnings.
With that being said, let’s get into some specifics:
- Dividend tax is payable on your personal tax return.
- Tax Percentage is dependant on your tax band:
- Lower rate taxpayers: 7.5%
- Higher rate taxpayers: 32.5%
- Additional rate taxpayers: 38.1%
- Everybody get’s their first £2,000 worth of dividend tax free.
Because dividend’s are quite arbitrary, meaning they are all the same, there are no tax exempt dividends.
How to Calculate your Dividend Tax Bill
Again, you can use HMRC’s online calculator to figure out how much tax you will pay on your dividends. But I’ll run down the basic calculations below.
This example will be considering the following knowledge:
- This person has income of £45,000 per annum from their day job.
- Dividend income for the year was £10,000.
- No other income during the period.
First thing you will notice, is that this dividend income will push the person into the higher rate tax band. So we need to be careful where the margin is:
£45,000 + £10,000 = £55,000
So £5,000 of the dividend income will need to be assessed at the higher tax rate. Note, the £2,000 free allowance doesn’t lower your annual income, just your tax bill.
So we already mentioned the £2,000 free allowance, so we can take this off:
£10,000 – £2,000 = £8,000
Note: The £2,000 free dividend has to come off the lower taxable amount as it must be assessed first. So the tax calculation is below:
£3,000 at the lower tax rate of 7.5%:
£3,000 * 7.5% = £225
£5,000 at the higher tax rate of 32.5%:
£5,000 * 32.5% = £1,625
Total tax payable from dividend income: £1,850
When you Should Consult a Professional
You should always consult with a professional tax advisor or accountant regarding your investment income. There are some very niche and complicated issues that can arise when calculating tax from stock market gains, which will stump those who are not confident in this area. Such as:
- Timing issues with sale of assets: Which tax year was it in?
- Different tax band earnings: If you dividend income pushes you into a higher tax band the calculation can get complicated if you don’t know the tax rules. There might also be a way of saving money on tax in some of these cases.
- Capital Gains tax exemption rules: This area of tax is the most complicated, I regularly use specialist capital gains tax advisors at my accountancy firm because the rules surround capital gains are so extensive.
- Tax savings can be made if investments are made wisely: Using pension accounts, ISAs, Bonds, and PEPs can save thousands in tax. Most of these options are only available if you invest through a firm or with a professional, you can only get a ISA account on certain brokerages like Trading 212.
Being Safe with Capital Gains Tax
As I mentioned above, you should always consult a professional whenever you are unsure about something.
HMRC are very strict about personal tax submissions, and if they don’t like the look of something they will throughly investigate it. So be careful with you calculations and utilise their online guidance notes. You can also contact us with any queries.