What Taxes Do Stock Market Investors Pay?
There are a whole variety of taxes that you could end up paying if you are a share trader or investor. The most important ones are:
Income Tax
Individuals pay income tax on any income they receive from shares or other securities.
How much tax you pay depends on how much income you earn during the tax year:
• Interest is taxed at 10%, 20%, 40% or 50%.
• Dividends are taxed at 10%, 32.5% or 42.5%, although the 'effective' tax rates will be either 0%, 25% or 36.1%.
In addition, it should be noted that any trading income is subject to income tax, although it would be taxed at either 20%, 40% or 50%.
In most cases profits made from selling shares are subject to capital gains tax. However, if the taxman classes you as a share trader your profits will be taxed as income.
Capital Gains Tax (CGT)
For most investors this is the most important tax to consider and it is examined in considerable detail throughout this guide.
Capital gains tax is usually payable on any profit you make when you sell an asset. More precisely, tax is payable on the 'chargeable gain', which is the amount left over after you have deducted a variety of reliefs and allowances.
The CGT rate for disposals after 5th April 2008 was fixed at 18%. In the emergency Budget on 22nd June 2010 a new 28% CGT rate was introduced. This new rate is payable by higher-rate taxpayers who sell assets after 22nd June 2010.
Despite this increase in CGT, you are usually much better off paying capital gains tax instead of income tax. For most higher-rate taxpayers there is a 12% tax saving. Those who earn over £150,000 pay income tax at 50% and enjoy a 22% tax saving!
Not only is capital gains tax levied at a lower rate than income tax, it also offers more opportunities for constructive tax planning.
Stamp Duty
Individuals and companies have to pay stamp duty when they buy most shares or other securities.
The rate for shares is fixed at 0.5%.
There's not much you can do to avoid stamp duty (except join the campaign to have it abolished!). However, share investors are much luckier than property investors who often end up paying 3-5% on their investments.
Corporation Tax A UK resident company pays corporation tax on its worldwide income, profits and gains. It does not pay income tax or capital gains tax.
To calculate a company's tax bill, its total income and capital gains are simply added together and subjected to corporation tax.
The effective rates of corporation tax vary from 20% to 24%, depending on the level of the company's profits. Inheritance Tax (IHT)
Any shares owned at the date of an individual's death will ordinarily be included within the estate for inheritance tax purposes, although there are certain reliefs available.
Where it applies, IHT is charged at 40% on the value of the estate exceeding the nil rate band (currently £325,000).
There are special provisions for transfers of shares (or other assets) to trusts or companies in which case an immediate inheritance tax charge can arise, irrespective of the fact that the person making the gift has not yet died.
Companies aren't liable for inheritance tax although in exceptional circumstances certain dealings by companies can result in shareholders paying tax.
National Insurance
National insurance would only be relevant if:
• You take on an employee to assist you in your share dealing activities. In this case, class 1 primary and secondary contributions would be payable (by the employee and the employer).
• You are classed as a share trader. In this case class 2 and 4 contributions would be payable by you, as with any self-employed individual.
• You establish a company and decide to pay yourself a salary. In this case class 1 contributions have to be paid. Value Added Tax (VAT)
Almost every share investor or trader will end up paying VAT, for example when you pay for software, website subscriptions or other electronic information. For example, if you bought the electronic version of this tax guide from our website you will have paid VAT! However, if you bought the printed edition you will not have paid any VAT because printed books are 'zero-rated'.
In the vast majority of cases there is nothing you can do about VAT. In the unlikely event that you are VAT registered the tax you pay can be recovered in full.
Summary
As a share investor or trader you are likely to pay a wide variety of taxes: income tax, capital gains tax, stamp duty, VAT and inheritance tax.
The most important tax, without doubt, is capital gains tax. If gains on disposal are large your tax bill could also represent a significant sum. However, as we will see, there is plenty you can do about it.
About the Author
The Author of this article is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).
He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
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