Watch out! Just £5,000 in UK shares could mean you owe the taxman
From 6 April 2024, the annual dividend allowance fell from £1,000 to a measly £500.
Published
September 3, 2024
With UK-listed companies trading at attractive valuations with chunky dividend yields, it won’t take a five- or six-figure portfolio to start running up a tax bill if you’re not investing in a tax-efficient account.
A £7,500 portfolio with an overall yield of 6.8% would generate dividends of just over £500 per year, meaning that you’d likely have to file a tax return.
If you had a £6,000 portfolio equally weighted amongst the five stocks with the highest dividend yields, the portfolio would generate more than £530 in dividends each year. Bear in mind, this is just over half the size of the average annual subscription to a stocks and shares ISA in the UK*.
The average annual subscription to a stocks and shares ISA is £8,690*. A portfolio of this size equally weighted amongst these 21 shares would generate you around £580 in dividend, requiring you to file a tax return and pay dividend income tax for the 2024/25 tax year.
Some stocks, such as Phoenix Group (£PHNX) and British American Tobacco (£BATS) deliver more than £500 in dividends from holdings of around £5,000.
Past performance is not a reliable indicator of future returns. Share prices and dividend yields are correct as of Friday 22 March 2024. If a company has announced a cut or increase to its dividend, the new figure is quoted. HSBC and Rio Tinto dividend per share converted to GBP at a rate of $1:£0.79381. Source: Refinitiv.
To top it all off, the capital gains allowance has been halved from £6,000 to just £3,000.
Before 6 April 2024, you didn’t have to pay tax on any gains you made below £6,000. This tax-free amount has dropped to just £3,000, meaning more of your gains will now be taxed at between 10% to 20% depending on your tax rate.
If there was ever an extra incentive to open and use up your annual ISA allowance, this would be it.
With tax allowances being reduced (both on capital gains and UK dividend income), this means the threshold to file a tax return can creep up on many who might feel that their earnings are modest by a number of measures. So, if and when you want to sell some stocks, there’s a risk you could breach the CGT-free threshold and end up owing a tidy sum to the taxman.
Consider this: if you bought 100 Amazon shares in December 2013 it would have cost you around £1,200. Fast forward to today and you want to sell those shares, you’d net yourself a tidy £13,470.
Well, only if you bought them inside a stocks and shares ISA. If those Amazon shares were held in a regular GIA, you’d need to pay £925 in capital gains tax (or £1,850 if you’re a higher rate taxpayer).
Remember, ISAs are for long-term investing. Sheltering your investments early is important to minimise your tax liabilities later.
💡 A stocks and shares ISA is available with our Standard and Plus plans. Compare our plans here.
Amazon (AMZN) 5 year past performance table
Source: investing.com
* The average subscription to a stocks and shares ISA was £9,432 for the 2020/21 tax year and £8,690 for the 2021/22 tax year. These are the most recent statistics from HMRC (released in June 2023).
Important information
When you invest, your capital is at risk. The value of your investments 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 returns.
Freetrade does not give investment advice and you are responsible for making your own investment decisions. If you are unsure about what is right for you, you should seek independent advice.
ISA eligibility rules apply. Tax treatment depends on personal circumstances and current rules may change.
