Tax treatment depends on your individual circumstances and may be subject to future change.
From 6 April 2023, the way that shares are taxed changed. Both the dividend tax and capital gains tax allowances have been halved.
The move will drag more people into paying tax on their profits. Further cuts are expected in April 2024.
In this article, we explain three main taxes your need to watch out for when buying and selling shares, including:
- What is dividend tax?
- Do I need to pay stamp duty?
- How much is capital gains tax?
- How do I avoid paying tax on shares?
Want to know your take-home pay after tax? Try this free income tax calculator.
Investing in shares is like owning a tiny piece of a company. Many well-known businesses such as BP, Coca-Cola and Amazon are listed on stock markets, which means people can buy shares in those companies.
It’s a way for businesses to get cash to help them grow and for investors to benefit from that growth.
If the share price goes up between you buying and selling, you make a profit. The company may also pay dividends on a regular basis to reward its shareholders, which is a bit like a cashback reward.
But where there is money to be made, expect the taxman to be lurking somewhere nearby.
Want to know how to buy shares? We explain.
There are two ways to earn money from shares:
1. The first is if the company grows and becomes more valuable then your piece of the company will be worth more.
2. The second way is if the company in which you are invested in pays its shareholders a little bit of money, called a dividend, out of its profits each year.
For the latter, the taxman views this payment like a mini salary for you, even though you aren’t doing any work. This means you will have to pay income tax on investments if your total dividends in a year come to more than £2,000.
Everyone has a tax-free personal allowance (£12,570 in the 2023/24 tax year and frozen until 2028).
Any money that you receive from your investments will be added to all your other types of income, including wages, personal pensions and rental income.
Depending on all your earnings, you will then be taxed at the bracket that is applicable to you. We outline the thresholds below, which changed for additional-rate taxpayers on 6 April 2023.
|Less than £12,570
|£12,570 to £50,270
|£50,270 to £125,139
Read our guide on income tax and enter your earnings into our income tax calculator.
Do I have to pay tax on shares?
It depends. There are tax-free thresholds for stamp duty, dividend and capital gains tax, which we outline in this article.
If you exceed these thresholds then it is likely you will have to pay tax.
However, if your shares are held in a tax-efficient product like an ISA or a pension, you won’t be subject to dividend or capital gains tax.
How much tax do you pay on shares?
It depends on whether you are buying, selling or earning dividends on shares.
Everyone gets a dividend tax-free allowance each year. You won’t have to pay the tax bill if the dividends you earn in a tax year are below £1,000.
This changed on 6 April 2023 after the chancellor Jeremy Hunt, in his autumn statement in November, announced cuts to the dividend allowance:
- In April 2023 the tax-free dividend allowance will fall from £2,000 to £1,000
- It will be cut again to £500 in April 2024
Remember: dividends from shares held in a stocks and shares ISA or pension are tax-free.
You do not need to tell HMRC if your dividends are within the allowance for the tax year.
The tax rate you pay on dividends that exceed the allowance depends on your income tax band, which you can work out by adding your total dividend income to your other income.
In April 2022, the dividend tax rates increased by 1.25%.
Here are the current rates:
- 8.75% for basic rate taxpayers (from 7.5%)
- 33.75% for higher rate taxpayers (from 32.5%)
- 39.35% for additional rate taxpayers (from 38.1%)
Dividend tax example
Say you earn £4,000 in dividends plus £31,500 in salary in the 2023/24 tax year, giving you a total income of £35,500.
We all have a personal allowance of £12,570 which you deduct from your total income. This gives you a taxable income of £23,930. You are in the basic-rate tax band.
So you would pay:
- 0% tax on £1,000 of dividends because of the dividend tax allowance
- 8.75% tax on the extra £3,000 of dividends = £255 tax to pay (up from £175 tax to pay in the 2022/23 tax year)
How do I pay my dividend tax bill?
How you pay your tax bill depends on the amount of dividend income you received in the tax year.
If you earn less than £10,000 then you can:
- Tell HMRC by contacting the helpline and asking it to change your tax code. The tax will be taken from your wages or pension.
- Or if you already fill in a self-assessmenttax return, you include the dividend details on it.
If you earn more than £10,000 in dividends you have to fill in a self-assessment tax return. Find out how to fill in a tax return.
If you don’t already do one, remember that the deadline for registering is 5 October after the end of the tax year. We tell you about the deadlines at the bottom of this article: When does the tax year end? Your checklist
Once you have registered, you will get a letter from HMRC telling you what to do next.
When you buy shares, you might have to pay stamp duty. You may be more familiar with this when it comes to buying a home.
When you go into a store and buy a T-shirt, you may not see it on the receipt, but included in the price is VAT. This is the tax bill you pay on most goods and services you purchase in the UK.
Shares in a company have something similar: stamp duty.
Most company shares are purchased electronically using something called the CREST system (no, it has nothing to do with toothpaste), while others are bought in the traditional way with paper certificates. Both incur stamp duty.
How your tax bill is calculated depends on how you buy the shares:
- Paper = Stamp Duty: set at 0.5% on trades over £1,000 and rounded up to the nearest £5. So if you buy £9,500 worth of shares, 0.5% stamp duty is £47.50, or £50 once rounded up. You must send your stock transfer form to HMRC for stamping along with your payment within 30 days.
- Electronically = Stamp Duty Reserve Tax: set at 0.5% of the value of any trade, but only rounded up or down to the nearest penny and taken automatically when you buy. You pay tax on investment, even the shares’ actual market value is higher, so if your £9,500 worth of shares in a company are actually valued at £15,000, you only pay SDRT on £9,500.
The good news is that you’re not always subject to taxes. It depends on the type of transaction.
You DO pay stamp duty if you buy:
- Existing shares in a UK company
- An option to buy shares
- Shares in a foreign company that has a share register in the UK
You DON’T pay stamp duty if you buy:
- Shares worth up to £50,000 as an employee of the company
- A new issue of shares in a company
- Shares in an open-ended investment company (OEIC)
- Units in a unit trust
- Exchange traded funds (ETFs)
- Foreign shares outside the UK
- If you are given shares for nothing
If you owe tax and don’t pay your bill on time, watch out because you may face a penalty and will be charged interest. We explain how to fill in a tax return and tell you about the tax deadlines.
You do not need to pay SDRT if you are given shares as a gift.
If someone has left you shares, then any inheritance tax owing should be paid by the deceased person’s estate. Find out more in our guide on inheritance tax.
How an inherited portfolio is treated for tax depends on where it is held and the type of shares contained within it.
Money held in an ISA or investment account might be liable for inheritance tax, but a portfolio held in a pension can typically be passed on IHT free.
Capital gains tax
It’s time to say goodbye to your shares. Hopefully they’ve gone up in value and you are set to make a profit. If so, the downside is you may need to pay capital gains tax.
Note that it is the profit that incurs the tax, not the price you sell your investment for.
You have a capital gains allowance which is set at £6,000 in the 2022/23 financial year (down from £12,300 in 2022/23). If your profits are below this level then you don’t have to pay CGT.
From April 2024, the allowance will fall again to £3,000. Find out more in our guide to capital gains tax.
You don’t usually need to pay capital gains tax if you give shares as a gift to your husband, wife, civil partner or a charity.
Or when you dispose of:
- Shares you’ve put into an ISA or PEP
- Shares in employer share incentive plans (SIPs)
- UK government gilts
- Premium Bonds
- Qualifying corporate bonds
- Employee shareholder shares, depending on when you got them
If you do have to pay CGT on shares, it is levied at either 10% or 20%, depending on whether you are a basic-rate or higher-rate taxpayer.
So, if you bought shares for £5,000 and then sold them for £20,000, that would be a tidy £15,000 gain. Following the cut to the CGT allowance from 6 April 2023, £9,000 of that amount would be taxable, down from £2,700 in 2022/23.
At 10% or 20%, capital gains tax of £900 or £1800 would be due, depending on whether it was charged at the basic or higher rate.
Different capital gain tax rates apply if you are buying a property. Find out more in our CGT guide.
Possibly the best way to avoid paying tax is to invest your shares in a tax-free “wrapper” like an ISA or a pension.
These financial products allow your money to grow free from the grasp of the taxman, so you can buy and sell shares without even worrying about the tax-free thresholds.
The added bonus with pensions is that they don’t just help you avoid dividend and capital gains tax, but allow your money to grow free from income tax too.
Find out more in our guide on ISAs and pensions.
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As an expert and enthusiast, I have access to a wide range of information and can provide insights on various topics, including tax treatment for buying and selling shares. I can help answer questions related to dividend tax, stamp duty, capital gains tax, and how to avoid paying tax on shares. Let's dive into the details!
Dividend tax refers to the tax paid on the dividends received from shares. Dividends are payments made by companies to their shareholders as a way to distribute profits. Here are some key points regarding dividend tax:
- Everyone has a tax-free dividend allowance each year. As of April 2023, the tax-free dividend allowance has been reduced from £2,000 to £1,000, and it will be further reduced to £500 in April 2024 [].
- Dividends received within the tax-free allowance do not need to be reported to HMRC (Her Majesty's Revenue and Customs) [].
- Dividends received above the tax-free allowance are subject to income tax. The tax rate depends on your income tax band. The current dividend tax rates are as follows:
- 8.75% for basic-rate taxpayers (up from 7.5%)
- 33.75% for higher-rate taxpayers (up from 32.5%)
- 39.35% for additional-rate taxpayers (up from 38.1%) []
To calculate your dividend tax, you need to add your total dividend income to your other income and determine the applicable tax rate based on your income tax band. An income tax calculator can help you estimate your take-home pay after tax.
Stamp duty is a tax that may be applicable when buying shares. It is similar to VAT (Value Added Tax) and is calculated based on the value of the shares being purchased. Here are some important points about stamp duty:
- Stamp duty is set at 0.5% of the value of the shares for trades over £1,000. The amount is rounded up to the nearest £5 for paper transactions and rounded up or down to the nearest penny for electronic transactions [].
- Stamp duty is payable when buying existing shares in a UK company, buying an option to buy shares, or buying shares in a foreign company with a share register in the UK [].
- However, there are certain cases where stamp duty is not applicable, such as when buying shares worth up to £50,000 as an employee of the company, buying new issues of shares, or buying shares in certain investment products like open-ended investment companies (OEICs) or exchange-traded funds (ETFs) [].
It's important to note that if you owe stamp duty and fail to pay it on time, you may face penalties and interest charges.
Capital Gains Tax
Capital gains tax (CGT) is a tax on the profit made from selling or disposing of an asset, including shares. Here are some key points about capital gains tax:
- The capital gains tax allowance for the 2022/23 financial year is £6,000. This means that if your profits from selling shares are below this amount, you do not have to pay CGT. However, from April 2024, the allowance will be reduced to £3,000 [].
- If you do have to pay capital gains tax on shares, the tax rate depends on your income tax band. Basic-rate taxpayers pay CGT at a rate of 10%, while higher-rate taxpayers pay at a rate of 20% [].
- There are certain cases where capital gains tax is not applicable, such as when giving shares as a gift to your spouse, civil partner, or a charity, or when disposing of shares held in an ISA, PEP, or certain other investment products [].
Investing shares in tax-efficient products like ISAs or pensions can help you avoid paying dividend tax and capital gains tax. These financial products provide tax advantages and allow your investments to grow free from the grasp of the taxman.
Please note that tax treatment can vary depending on individual circumstances and may be subject to future changes. It's always a good idea to consult with a tax professional or refer to official tax guidelines for personalized advice.
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