In the UK, taxation of financial returns in excess of allowances follows Income Tax. The rates are as follows: 0% up to £12,570, 20% from £12,571 to £50,270, 40% from £50,271 to £125,140 and 45% over £125,140.
There are at least three allowances in the UK that do not require you to pay tax on your savings interest: 1) the Personal Allowance, 2) the Starting Rate for Savings and 3) the Personal Savings Allowance.
You can claim the personal allowance as long as you do not claim it on other forms of income (salary, pension, etc.). The basic rate of tax on savings exempts you from paying tax on up to £5,000. However, a) this figure decreases as your income increases, b) this exemption no longer applies if you have an income of £17,570 or more. The Personal Savings Allowance exempts up to £1,000 from tax, but divides taxpayers into three bands according to income: the basic band has an allowance of £1,000, the higher band has an allowance of £500 and the additional band has no allowance. In the case of dividends from shares, the rates are as follows: basic rate 8.75%; higher rate 33.75%; additional rate 39.35%.
But what if you have already paid tax on income below the threshold? The answer is that you can claim a refund on your tax return or by completing form R40. As long as you do so within four years of the end of the tax year in question. Finally, savings abroad and savings for children have their own tax rules.
In general, when you buy a share you pay 0.5% on the transaction: Stamp Duty Reserve Tax (SDRT) if electronic, Stamp Duty if via a share transfer form and the value exceeds £1,000; the tax is automatically applied to electronic purchases on the market, while for off-market transactions the amount has to be paid directly to HMRC. The rate rises to 1.5% for transfers to certain custodian or clearing services. It is important to note that the rate is applied to the purchase price of the shares, not their market value. Capital gains tax, on the other hand, is the tax paid on gains made on the purchase, sale and/or disposal of financial assets. The tax-free allowance is set at £6,000, although this is reduced to £3,000 in the case of investment trusts.
The rate on the purchase of shares does not apply to shares that are (a) received free of charge, (b) newly issued, (c) purchased in unit trusts or in open ended investment company from the fund manager. Other taxes generally apply to foreign shares purchased outside the UK.
Capital gains tax does not apply to gifts to a spouse/civil partner/charity or where the shares are part of these financial instruments: ISAs, PEPs, Employee Incentive Share Plans, UK government gilts, qualifying corporate bonds, employee shares purchased during certain periods. Instead, unit trusts are taxed. Certain costs, such as Stamp Duty Reserve Tax and certain commission costs, can be deducted from capital gains tax.
Private pensions are exempt from tax up to certain limits: this applies to most private pension plans, including occupational, personal, stakeholder and qualified overseas pension plans. Plans must be registered with HM Revenue and Customs (HMRC) to qualify for tax relief. Generally, pension plans are tax-free if the payments (a) do not exceed 100 per cent of your annual earnings and (b) do not exceed the £60,000 tax-free allowance. However, there may be reductions in the allowances for higher incomes. Tax must be paid at the time money is taken from the pension. Tax relief is also conditional on the provider being registered with HMRC and complying with HMRC rules.
What has been written so far is, of course, only an introduction to the UK tax system for financial investments. For more detailed information (including further taxation or possible deductions and allowances) you can either contact HMRC or consult the government guide available at https://www.gov.uk/browse/tax, or contact a financial adviser, particularly a tax adviser.
See also
What does Financial Investment Return mean?
What do supplementary and private pensions mean?
What is financial advice and what does a financial advisor do?
