ETF/Foreign shares taxation without self-assessment return

NickBFS

I expect my sources of taxable income for the current tax year will be as follows:

1) employment;

2) DB pension;

3) interest from savings with UK banks and building societies;

4) dividends and capital gains from UK Reporting Irish-domiciled ETFs.

My total taxable income will be considerably below the £150,000 threshold (it should, in all likelihood, remain below the higher rate threshold).

I am not currently subject to self-assessment. Tax for 1) and 2) is taken at source (through PAYE) but not for 3) and 4). I am trying to ascertain whether my understanding of my tax reporting obligations (and in particular of whether I need to register for self-assessment and fill a tax return), as outlined below, is correct.

As to 3), As long as the income from savings remain below £10,000, there is no obligation to file a tax return.

I can, if I want, report my savings income to HMRC through my personal tax account but I do not have to, since HMRC will get this information directly from the relevant financial institutions anyway.

As to 4), AIUI, as long as the dividends (including excess reportable income) remain below £500, I do not need to file a tax return (even though the dividends are 'foreign income'). If, however, I exceed that threshold, I will have to register for self-assessment, no ifs no buts.

With respect to any capital gains, there is also no obligation to file a tax return. 

If my capital gains are below the CGT allowance (£3000 for the 24-25 tax year) and the ETFs were disposed of for less than £50,000, I do not have to report capital gains to HMRC at all.

If, however, my gains are above the allowance (or I sell £50,000 or more worth of ETFs) then I will need to report my gains to HMRC but I can use the real time CGT service (instead of filing a tax return) before the end of December 2025 (for capital gains within the 24-25 tax year).

Did I get this right?

Dazed_and_C0nfused

What would plan on doing if your dividend income was say £400.  And you didn't meet any other criteria to complete a Self Assessment return?

masonic

Don't forget about excess reportable income when adding up your ETF dividend income.

You might be able to escape SA by telling HMRC about dividend income in excess of £500. They would tell you if they require you to self-assess or they will collect via tax code adjustment.

NickBFS

Dazed_and_C0nfused said:

What would plan on doing if your dividend income was say £400.  And you didn't meet any other criteria to complete a Self Assessment return?

Well, that is precisely the situation I had in mind. AIUI, in that situation, I do not need to fill in a tax return and I do not need to report dividends either, since they are below the dividend allowance threshold. The only tax payable beyond that which is already taken at source would be the savings income, which HMRC could tax via tax code adjustment the following year (and conceivably capital gains if my gains are above the threshold, in which case I would use the real time CGT service to report them to HMRC).

Dazed_and_C0nfused

NickBFS said:

Dazed_and_C0nfused said:

What would plan on doing if your dividend income was say £400.  And you didn't meet any other criteria to complete a Self Assessment return?

Well, that is precisely the situation I had in mind. AIUI, in that situation, I do not need to fill in a tax return and I do not need to report dividends either, since they are below the dividend allowance threshold. The only tax payable beyond that which is already taken at source would be the savings income, which HMRC could tax via tax code adjustment the following year (and conceivably capital gains if my gains are above the threshold, in which case I would use the real time CGT service to report them to HMRC).

Well there is no "allowance" for dividends, just a 0% tax rate.

So the best thing to do is check if the dividend income actually impacts your tax liability (even though taxed at 0%) and notify HMRC of the income if it does.

The four situations where this is most likely to happen (none of which might be relevant to you) are,

1.  Calculation of High Income Child Benefit Charge
2.  Calculation of tapered Personal Allowance
3.  Calculation of Married Couples's Allowance
4.  Eligibility for Marriage Allowance

NickBFS

masonic said:

Don't forget about excess reportable income when adding up your ETF dividend income.

You might be able to escape SA by telling HMRC about dividend income in excess of £500. They would tell you if they require you to self-assess or they will collect via tax code adjustment.

The ETFs I invest in are distributing and the ERI is peanuts but, yes, I will check in due course.

I am toying with the idea of selling before the ex-div date and buying again after it to avoid exceeding the threshold if if I am getting too close to it and risk overshooting marginally (and possibly rinse some capital gains in the process by buying a different but similar ETF) rather than letting HMRC decide whether to exempt me from self-assessment.

eskbanker

Is the prospect of self-assessment really that intimidating?  It's not a particularly onerous process and could easily have been completed in the time it took to research your first post, so you might be at risk of letting the tail wag the dog if you're actually contemplating changing investment behaviour in an attempt to avoid it!

NickBFS

Dazed_and_C0nfused said:

Well there is no "allowance" for dividends, just a 0% tax rate.

So the best thing to do is check if the dividend income actually impacts your tax liability (even though taxed at 0%) and notify HMRC of the income if it does.

HMRC calls it an allowance: see this page, for instance. 

The significance of the threshold is that, while any foreign income normally means that a tax return has to be filed, there is an exception when the only foreign income is dividends and the total dividends earned (both foreign and UK) is less than £500: see this page. 

Dazed_and_C0nfused said:

The four situations where this is most likely to happen (none of which might be relevant to you) are,

1.  Calculation of High Income Child Benefit Charge
2.  Calculation of tapered Personal Allowance
3.  Calculation of Married Couples's Allowance
4.  Eligibility for Marriage Allowance

None of these apply to me.

NickBFS

eskbanker said:

Is the prospect of self-assessment really that intimidating?  It's not a particularly onerous process and could easily have been completed in the time it took to research your first post, so you might be at risk of letting the tail wag the dog if you're actually contemplating changing investment behaviour in an attempt to avoid it!

Well, 'I do not think that it could easily have been completed in the time it took to research [my] first post'  because, had I not carried out that research, I would not have had the remotest clue as to whether I needed to fill a tax return, why and how. This is the first time I have investment income outside a tax wrapper and I had quite a bit of a learning curve on how ETFs are taxed, the significance of fund domiciliation and reporting status for taxation purposes as well as such niceties as excess reportable income and where to find it, together with reporting obligations, whether through a tax return or otherwise. It is in the process of carrying out that research that I discovered that there is normally an obligation to file a tax return when one has that type of income and also what exception there might be to it.

It is true that, armed with that knowledge, I have a clearer sense of how I would go about filing my tax return, if I have to file one, and that we are probably talking of a process taking no more than a few hours, and not weeks of work. Still, I can think of more fun activities to do on a rainy day than filing a tax return that I do not have to fill. Also, filing a tax return also raises the risk of making errors in filing the return and attracting the ire of HMRC in the process. So, unless I need to, I would, on the whole, prefer to avoid it.

You make an excellent point, however, about the risk of the tax (or tax-work) tail wagging the investment dog. I thought about it and, clearly, I would not, for instance, substantially reduce my investments merely to keep myself under the dividend allowance threshold.  But if I can save myself an afternoon's tax filing work by switching, say, a Vanguard world tracker ETF to its Invesco equivalent (something that I might want to do to mop up the, ever-decreasing, CGT allowance anyway), this may well be worth the small transaction cost and small risk of being out of the market for a couple of days, no?

The question arises for me this year as my dividend income is likely to be around the £500 mark. My dividend income is likely to substantially increase next tax year. I guess I could switch from ETFs to OEICs to avoid the 'foreign income' issue (which is unavoidable with ETFs in the absence of UK-domiciled ETFs) and, in doing so, raise the dividend threshold from £500 to £10,000 for self-assessment but I will need to give that more thought when the time comes to consider the issue.

gt94sss2

If your income is above £100,000 and/or you make additional pension contributions I would also suggest you consider doing a tax return even if not strictly required

NickBFS

gt94sss2 said:

If your income is above £100,000 and/or you make additional pension contributions I would also suggest you consider doing a tax return even if not strictly required

As I said above, I expect my taxable income to be below the higher rate threshold, so below £50K.