How are my shares taxed?

Our guide to all things investment tax.
How are my shares taxed?
May 10, 2022

Table of contents

We’re told nothing is certain in life except death and taxes. 

And while it may not be the most uplifting thought, there are a few benefits to certainty. 

For starters, certainties are easier to plan for. 

If you know how your investments will be taxed you’re in a good place to work out how to invest in the most tax-efficient way. 

Thanks to the UK government we all have tax-free allowances and tax-efficient investing accounts like ISAs and SIPPs to make the most of. 

In this guide, we’ll cover the big questions. 

How are investments taxed? How are the taxes calculated? How much tax might you have to pay? How can you invest tax-efficiently?

Quick fire questions: how are shares taxed?

Do you pay tax on shares? 

There are a few taxes to know about when it comes to investing in shares and they happen at different points in the investment journey. 

Here are the main taxes to know about:

  • Capital gains tax - a tax on any profits you make when you sell your investments 
  • Dividend tax - a tax on dividend income you’re paid 
  • Stamp duty reserve tax (SDRT) - which is charged when you buy most UK shares 

There’s a section covering each tax later on in the guide.

What do you pay tax on?  

Taxes generally arise from the money you make from your shares. 

If your shares grow in value over time and you sell them for a profit, you’ll have to think about capital gains tax. 

If your shares pay you a dividend, you’ll have to consider whether dividend income tax would apply.

When don’t you pay tax? 

In a tax-efficient account. 

You won’t need to worry about capital gains tax or income tax on dividends if you hold your shares in a tax-efficient investing account like an ISA (individual savings account) or a SIPP (self-invested personal pension).

When you use your personal allowances.  

Each tax year (which runs 6 April - 5 April) the UK government sets tax-free allowances, which are amounts most of us can earn without having to pay tax. 

Here are the allowances for the current tax year (2022/23):

Capital gains tax allowance

We can each earn £12,300 in profits before having to consider capital gains tax. You may also be able to use losses, which we discuss in more detail later on. 

Dividend tax allowance

Each of us can be paid £2,000 in dividend income before UK dividend income tax comes into the picture.

Here’s a summary of the main taxes and corresponding tax-free allowances.

Tax What's taxed The scenario Basic rate tax payer Higher rate tax payer Additional rate tax payer ISA investor
Capital gains tax Your gains You make a profit on the sale of your investments in a year, that's above the the £12,300 tax-free allowance. 10% 20% 20% 0%
Dividend tax Your dividends You're paid over £2,000 in dividends in a year. 8.75% 33.75% 39.35% 0%
Interest income Interest from cash savings, corporate bonds and other fixed interest products You earn interest on your cash savings or you're paid income from bond investments. 20% (interest over £1,000) 40% (interest over £500) 45% 0%

UK income tax bands 

Knowing whether you are a basic, higher or additional rate income taxpayer is crucial when it comes to understanding which tax rate you’ll end up paying on your investments.

Here’s a summary of the UK income tax bands and rates.  

UK income tax bands and rates - Summary

Capital gains tax (CGT)

What is CGT?

Capital gains tax is the tax you pay on any profit you make from selling an asset. 

CGT applies to your stocks and shares investments but it also applies to other assets like crypto, property or jewellery. 

We’ll stick to CGT and your investments in this guide but it’s important to be aware that these other assets all count towards your capital gains total and so can also use up your annual £12,300 CGT allowance. 

You could pay CGT on… You won’t pay CGT on...
Investments not held in a tax-efficient account.

Personal possessions worth over £6,000 (e.g. jewellery, paintings).

Property that’s not your main home and pays you an income.

Business assets (e.g. the land or building).

Investments held in an ISA or SIPP.

UK government bonds

Winnings (e.g. betting or lottery)

Selling your car - unless it’s used for business.

Your home

Gifts to your spouse or civil partner or a charity.

Please remember tax rules can change and benefits depend on your circumstances. For more information head to GOV.UK. This table is based on our understanding of the rules as at 5 May 2022. 

Capital gains tax rates 

The CGT rate you’ll pay depends on whether your gains, when added to your other taxable income like your salary, falls within the basic rate taxpayer band or higher rate. 

Capital gains tax rates for stockmarket gains 2022/23
Basic rate
Income £12,571 - £50,270
Higher rate
Income £50,271 - £150,000
CGT at 10% CGT at 20%

💡 Remember you have to add any gains to your other income streams to see where you land in a tax band. It’s not a case of “I’m a basic rate taxpayer, so I pay 10% CGT on my profits”. If when you include all of your gains,  you now earn more than the basic rate tax band (i.e. above £50,271 in a year), you could owe a higher rate of CGT. 

How is CGT calculated? 

Here’s how to calculate CGT step by step. 

  1. Work out your gains   

Work out your total profits from assets for a given year. This could include shares held outside of an ISA and SIPP, or profits made on the sale of a second home. 

It's also important to take into account any losses too. 

Let’s say you’ve sold some shares at a loss. Losses are first deducted from profits you’ve made in the same tax year. So these would decrease your amount going towards your annual allowance.

However, if your profits for the year are still above the £12,300 CGT allowance you can carry forward unused losses from previous years (up to four years ago). 

  1. Remove the tax-free allowance amount

Once you’ve got your total taxable gains, subtract the £12,300 CGT allowance. 

  1.  Add the remaining amount to your taxable income 

Add any gains (once you’ve taken off the CGT allowance) to other sources of income you have that year. Most likely this means adding it to your salary. 

  1. Check your tax rate & calculate tax 

If this number falls below the basic rate taxpayer band of £50,271 then you’ll pay 10% CGT on the gains. But, if it pushes you over into the higher rate tax bracket, you’ll owe 20% CGT on the gains that fall into this bracket. 

CGT example

Let’s say you make a £13,000 profit after selling some shares and in the same year your salary is £35,000. 

After deducting your CGT allowance, you're left with £700 taxable gains. And because your total taxable income (salary + gains from shares) is within the basic rate tax band, you’ll pay CGT at 10%, so you’ll owe £70 in CGT. 

Capital gains tax example

CGT things to think about

Here are some other considerations to keep in mind when sorting out your CGT.

You will pay CGT when…

You’ll likely need to pay CGT when you make a profit on your shares that’s over CGT allowance and you don’t hold your shares in an ISA or SIPP. 

You won’t pay CGT when…

You don’t need to worry about CGT when you’ve sold shares within an ISA or SIPP or if your profits that year don’t go above the £12,300 CGT allowance.

How to pay capital gains tax

Before you report your capital gains, you’ll need to have a few details to hand:

  • Your total gains (i.e. calculations of capital gains and any losses) 
  • Proof of what price you bought and sold the investments for

There are two ways to report CGT on your investments:

  1. Real-time capital gains tax service for UK residents 

You’ll need to know how much tax you owe and you’ll have to report your gain by December 31 in the tax year after you sold your investments. 

  1. Self-assessment tax return 

You’ll do this in the tax year after you sold your investments. You must send your online return by January 31 or if you submit it by paper, your form must be sent a few months earlier by October 31. 

HMRC will tell you how much tax you owe and you’ll have to pay by a deadline.

Dividend income tax

What is dividend income tax?

A dividend is a portion of a company’s profits paid out to shareholders. 

Not every company pays dividends (some choose to reinvest profits) and not every investor looks for dividends, but for some investors, dividends are an important source of income.

And that’s also how dividends are taxed - as income.

Dividend allowance

For the tax year 2022/23, the dividend allowance is £2,000 and this is the total amount of dividend income we can each be paid in a year without having to worry about tax.

After this point, unless your shares are held in a tax-efficient account like a SIPP or ISA, you’ll likely have some tax to pay.

Dividend tax rates

Similar to CGT, to work out which dividend tax rate you might have to pay, you have to add any dividend income to your overall income for that year. 

Dividend tax rates for 2022/23
Basic rate 8.75%
Higher rate 33.75%
Additional rate 39.35%

💡 Please remember tax rules can change and benefits depend on your circumstances. For more information head to
GOV.UK. This table is based on our understanding of the rules as at 5 May 2022.

How is dividend tax calculated? 

  1. Sum up total dividend income 

Add together how much dividend income you’ve received in the tax year and whether this goes over and above the £2,000 tax-free dividend allowance. 

If your dividend income is under the allowance of £2,000, there’s no tax to pay.  

  1. Check your tax band & calculate tax 

Add any dividend income that comes in over the dividend allowance to your other income for the year. 

Where this amount lies in terms of the basic, higher or additional rate income tax bands will dictate which dividend income tax rate you pay. 

Just like with capital gains tax you may pay tax at more than one rate.

Dividend income tax example

Let’s say you’re paid £3,000 in dividends and in the same year your salary is £52,000. 

After deducting your dividend allowance you’ll be taxed on the remaining £1,000 of your dividend income. And because your salary already puts you into the higher income tax bracket, you’ll pay a higher rate of dividend tax at 33.75% and owe £337.50 in tax. 

Dividend tax example

Dividend tax things to think about

You’ll likely pay dividend income tax when…

You’re paid dividends over and above the dividend allowance in a year and you don’t hold those shares in an ISA or a SIPP. 

You won’t have to pay dividend income tax when…

Your total dividend income for the year comes in below the annual dividend allowance or you hold your shares in a tax-efficient account like an ISA or a SIPP. 

Are reinvested dividends taxable in the UK? 

The simple answer is yes. Even if you choose to reinvest your dividends or hold accumulation units of an ETF (rather than having them paid out as an income), you will still have to think about dividend income tax each year. 

How are overseas dividends taxed in the UK?  

When shares are listed in other countries they may come with local and additional dividend taxes. 

Withholding tax on US dividends

The US Government charges non-US residents a 30% tax on any income received from US investments. Thanks to an agreement between the UK and the US, UK residents can generally reduce this tax to 15%. 

To do this you’ll need to fill in a W-8BEN form, which declares you’re not a US tax resident. If you’re a Freetrade customer we’ll prompt you to fill it in in-app.

How to pay dividend income tax

There are a few options when it comes to paying any tax you owe on dividend income. 

If you owe under £10,000 in dividend income tax you can: 

For dividend income tax owed over £10,000 you’ll need to fill in a self-assessment tax return

Stamp duty (reserve tax) or SDRT

What is stamp duty?

Stamp duty reserve tax (SDRT) is a tax applied when you buy UK shares electronically, which happens when you buy shares using an investment platform. 

It’s a standard 0.5% sales tax paid when you buy most UK-listed stocks. It’s not charged when you sell shares.  

You don’t have to worry about stamp duty when you buy most AIM shares, as they are exempt. You also won’t pay stamp duty on overseas shares or ETFs listed on UK exchanges that are domiciled overseas (which is the case for most UK-listed ETFs). 

When do you pay stamp duty?

You pay the tax when you buy the shares and it’s applied to the total transaction cost. You don’t have to worry about paying it yourself, it’ll happen automatically and is just deducted from the overall amount you pay. 

It’s worth remembering that you pay stamp duty even if you’re buying shares within a tax-efficient account, like an ISA or a SIPP.

Stamp duty example 

Imagine you decide to buy £700 worth of a UK main market listed stock, like Sainsbury’s, Tesco or M&S

Stamp duty reserve tax is charged at 0.5% of the value of the transaction, so that would be  £3.50. This amount is just deducted from the amount you pay when you first buy your shares and you’ll see it referenced on your order confirmation.

How to pay lower taxes on stocks 

The answer to this is simple. 

Think about putting your investments in a tax-efficient investment account like an ISA or a SIPP. 

Inside both accounts, you won’t have to worry about capital gains tax or UK income tax on dividends or interest. 

You can invest up to £20,000 in a stocks and shares ISA each tax year and while there are a few more ins and outs to be aware of, most savers can put up to £40,000 into a SIPP (pension) each year. Remember that ISA and SIPP rules will always apply.

GIAs still have a place thanks to their tax-free capital gains tax allowance and dividend income tax allowance, but it may be best to think about these after you’ve made use of your ISA allowance. 

What taxes apply for an ISA?  

Inside an ISA you don’t have to worry about the key UK investment taxes, which are capital gains tax and income tax. 

And when you take your money out of an ISA, any withdrawals are tax-free. 

The only taxes you need to be aware of when it comes to your ISA are overseas dividend taxes like the US withholding tax. And transaction taxes in the UK such as SDRT and the PTM Levy (which is a £1 charge when you buy or sell shares with a value of more than £10,000).

What taxes apply for a SIPP? 

Inside a SIPP you don’t have to worry about the big UK investment taxes either, you’re investments can grow away from taxes. Like any other investment account you still have to think about overseas dividend taxes, SDRT and the PTM levy (a £1 automatic charge for buys / sells over £10,000). 

The big difference to remember with a SIPP is what happens when you start taking money from it, which you can do from 55 years old (rising to 57 in 2028). 

We delve into the details in our SIPP guide but the key thing to know is you can withdraw 25% of your SIPP tax-free. How you do it is up to you, but anything you take out beyond this 25% will be taxed at whatever rate of income tax you pay at the time. 

This is really just something to keep in mind when you get closer to taking money out of your pension in order to make sure you do it in the most tax-efficient way.

What taxes apply with a GIA? 

GIAs don’t protect your investments from the big UK investment taxes. 

Inside a GIA, you’ll have to think about: 

  • Capital gains tax (a tax on any profits you make when you sell your investments and a few other assets).  
  • Dividend tax (a tax on UK dividends). 
  • Tax on savings (a tax on any savings interest you’re paid).  

Remember though, you might not have to worry about these straight away - as we’ve mentioned above, we all have tax-free allowances to make use of too.

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Important information on SIPPs

SIPPs are a pension product designed for people who want to make their own investment decisions. You can normally only access the money from age 55 (set to rise to 57 from 6 April 2028).

This article is based on current rules, which can change, and tax relief depends on your personal circumstances. When you invest, your capital is at risk.

The value of your portfolio can go down as well as up and you may get back less than you invest.

Before transferring a pension you should ensure you will not lose valuable guarantees or incur excessive transfer penalties. Pensions are usually transferred as cash so you will be out of the market for a period.

Freetrade does not currently offer drawdown products for our SIPP.

Important information

This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice.

When you invest, your capital is at risk. The value of your portfolio, and any income you receive, can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.

Eligibility to invest into an ISA and the value of tax savings both depend on personal circumstances and all tax rules may change.

Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).

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