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Understanding Investments and Tax

If you're making the move from saving to investing, understanding which solution is right for you can be a big decision. There's a lot to consider including:

  • what your investment goals are
  • how long you want to invest your money for
  • how much risk you're prepared to take in exchange for potential reward.

You'll also need to understand whether there is tax to pay on any returns. This can seem complex at first but understanding tax doesn't have to be taxing.


We've put together this quick overview to help get you started.  When you're ready to take the next step on your investment journey your Wesleyan Financial Services Consultant is on hand to guide you through the best options for your personal circumstances.

When it comes to understanding tax in relation to investments, there are three main categories to consider:

1. Income tax
2. Capital gains tax
3. Inheritance tax

You're probably already used to paying tax on your income, for example through paid employment or on your pension. Income from investments can be taxed in the same way. It's important that you understand this because if you're close to the threshold of a tax band, income from an investment could push you into a higher tax bracket and mean you pay a higher rate of tax.


However, not all the income you earn from investments will be subject to tax if you have a Personal Savings Allowance (PSA).

Understanding your tax-free Personal Savings Allowance

Your PSA will depend on how much you earn (your income tax band) and for the 2019/20 tax year the PSA bands are:

 
Income tax band Income band (England, Wales and Northern Ireland) Income band (Scotland) Personal Savings Allowance
Starter rate  - From £12,500-£14,549 £1,000
Basic rate £12,500 to £50,000 From £14,549-£24,944 £1,000
Intermediate rate  - From £24,944-£43,430 £1,000 
Higher rate £50,001 to £150,000 From £43,430-£150,000 £500
Additional rate Over £150,000 Above £150,000
known as the top rate)
£0 


Any income you receive from savings and investments that's above your PSA will be subject to tax in line with what part of the UK you live in, and your income tax band:


 
Income tax band Tax rate for the 2019/20 tax year (England, Wales, and Northern Ireland) Tax rate for the 2019/20 tax year (Scotland)
Starter rate   -  19%
Basic rate   20%  20%
Intermediate rate  -  21%
Higher rate  40%  41%
Additional rate   45%  -
Top rate   -  46% 


There's also a 0% starting rate for savings income of up to £5,000. Non-savings income above the starter rate will be subject to tax. If you qualify for a starting rate it will be reduced by £1 for every £1 of other income you earn above your PSA.

Tax on income from investments

Interest from the following savings and investments solutions may be subject to income tax:

  • Bank or building society accounts
  • National Savings & Investments products
  • Government or corporate bonds
  • Interest distributions from unit trusts or open-ended investment companies (OEICs) that invest mainly in interest-bearing assets (such as gilts and corporate bonds)
  • Some policies of life insurance (such as investment bonds).

Tax on dividends

You may also need to pay income tax if your investments provide an income in the form of dividend payments, such as:

  • Shares you own in companies
  • Investment trusts
  • Unit trusts and open-ended investment companies (OEICs) that invest mainly in shares.


The tax you'll need to pay on dividend payments is based on where the income sits within different tax bands.


The first £2,000 of dividend income received is free from tax for most individuals and the remainder is taxed at incremental rates:


 
Tax rate band  Tax on dividends over £2,000 for the 2019/20 tax year (England, Wales, Scotland and Northern Ireland)
Basic rate                          7.5%
Higher rate                          32.5%
Additional rate                          38.1%


Capital Gains Tax

Capital Gains Tax (CGT) is paid on profit you have accumulated, when you sell (or 'dispose of') an asset including some types of investment (such as  Unit Trusts, OEICs, and some types of bond, investment trusts, second properties or 'buy to lets').

It is the gain you make that is taxed rather than the overall value of the item you are disposing of. Disposing of an asset can include selling it, giving it to somebody else, or swapping it.

Most people have an annual CGT exemption - (known as the Annual Exemption Amount) of £12,000 in the 2019/20 tax year. If you're selling an investment and your profit exceeds this limit you may need to pay CGT (unless your investment sits within a tax-efficient ISA).


You only have to pay CGT on your overall gains above your tax-free allowance Annual Exempt Amount:

Capital Gains Tax Rates & Allowances for the 2019-2020 tax year

Annual exemption amount   £12,000 for individuals 
Standard capital gains tax rate  10% (18% on residential property - other than your main residence)
Higher capital gains tax rate  20% (28% on residential property - other than your main residence)
The rate (or rates) of CGT you may pay is based on your position within the income tax bands


Different investment products can have different implications for your potential CGT liability, so it's important to seek advice before deciding which solution is best for your personal circumstances.


Inheritance Tax

Most types of investments will form part of your estate when you die and may therefore be subject to inheritance tax (IHT).

This means that your loved ones (beneficiaries) may have to pay (IHT) on them in event of your death. However, the rules around IHT are complex and any payments due will depend on a number of factors including:

  • whether the value of your estate (including investments) is more than your nil-rate band (effectively a tax-free allowance)
  • who your assets will be passed on to (there are exemptions for example if you pass on your assets to your spouse, direct descendants such as your children or grandchildren, or charitable organisations.


This is a complex area for planning how you wish to leave your legacy, so it is important you understand the risks and seek advice if you are unsure. Your Wesleyan Financial Consultant can help you to understand any tax implications associated with your investment choices.


We're here to help


If you're curious about whether investing could be right for you, download our free Quick Guide to Investing.

Alternatively, if you're ready to speak to a Wesleyan Financial Services Consultant about your investment options, contact us to arrange an appointment on 0808 291 2688 and quote reference 1001305 or email: financialreview@wesleyan.co.uk

This information is based on our current understanding of legislation. Legislation and tax treatment can change in the future.

Please remember the value of investments and any income can go down as well as up and you may get back less than you invest.

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