Paying tax on investments outside an ISA

InvestInPoker

lpgm wrote: »

Remember that if you already fill in a tax return (e.g. if you're self-employed), you *do* have to declare all your dividends and tax credits.

This is what gets me. I do not already fill in a tax return as I have no taxable income. If I pay the dividend tax at source why does someone who fills out self assessment have to declare it and I don't? That part does not make sense to me.

lpgm

InvestInPoker wrote: »

This is what gets me. I do not already fill in a tax return as I have no taxable income. If I pay the dividend tax at source why does someone who fills out self assessment have to declare it and I don't? That part does not make sense to me.

As soon as you start earning/making money that's potentially taxable, it's your responsibility to start asking yourself if you need to let the tax man know.

bowlhead99

InvestInPoker wrote: »

This is what gets me. I do not already fill in a tax return as I have no taxable income. If I pay the dividend tax at source why does someone who fills out self assessment have to declare it and I don't? That part does not make sense to me.

There is only a small 'notional' dividend tax withheld at source. Taxes on UK shares or funds are not really 'withheld', in the sense that a low rate or zero rate taxpayer can't claim it back. It just reduces the effective rate paid by high rate taxpayers.

It is a simply a quirk of history in how the tax man interacted with companies paying corporation tax and paying out dividends and individuals receiving the dividends paid income tax. For a low or nil rate taxpayer there is no further tax to pay and you still receive the entire amount that the company or fund paid out - but due to this quirk, you are just told that a bit of your divi has been notionally withheld. You shrug and get on with your life.

The bit that answers your 'why' question is that the dividends you receive do count towards total taxable income. If you are still in the non taxpayer bracket you are a long way from it mattering because you have a large annual income tax allowance and then all of the low rate band before there's anything more to pay. If you were in the low rate bracket it might push you up to the top rate bracket. If you were in the top rate bracket you would need to pay more tax on the divs you received, in cold hard cash.

People who are low or nil rate taxpayers and have no tax return to fill out because their tax affairs are uncomplicated generally don't need to worry about dividends. However, if your tax affairs are more complicated:

- for example if you are renting out a property, or running a self-employed business, or making capital gains above the thresholds, or a high rate taxpayer needing to pay more taxes on their bank interest income that only got partially withheld at source, or someone claiming relief on their pension contributions etc etc -

and you are filling out a self assessment form anyway, you would be expected to include dividend information on it to make sure it is an honest and complete full self-assessment of your tax affairs.

hennerz

So is the capital gains tax allowance separate from the personal income allowance?

E.g. If I earned £8k from a part time job and £9k profit from the sale of shares I would still be under both allowances and no tax would be paid?

And if you bought shares in 2005, sold in 2015, it doesn't matter if the profit was made in year 1 or year 10, you pay the tax when you sell, if above CGT allowance?

masonic

hennerz wrote: »

So is the capital gains tax allowance separate from the personal income allowance?

E.g. If I earned £8k from a part time job and £9k profit from the sale of shares I would still be under both allowances and no tax would be paid?

And if you bought shares in 2005, sold in 2015, it doesn't matter if the profit was made in year 1 or year 10, you pay the tax when you sell, if above CGT allowance?

Yes, yes and yes.

jimjames

hennerz wrote: »

So is the capital gains tax allowance separate from the personal income allowance?

E.g. If I earned £8k from a part time job and £9k profit from the sale of shares I would still be under both allowances and no tax would be paid?

And if you bought shares in 2005, sold in 2015, it doesn't matter if the profit was made in year 1 or year 10, you pay the tax when you sell, if above CGT allowance?

The clue is in the name.

One allowance is for capital gains, the other is for income. They are separate allowances and not interchangeable.