Could owning stocks and shares impact your taxes?

Many business owners look into stocks and shares when seeking to diversify their investment portfolios and grow their wealth.

When it comes to investing in stocks and shares, the focus is often on potential returns, market trends, and risk assessments.

However, one crucial aspect that tends to be overlooked is the tax implications of your investments.

Understanding how your investment portfolio could affect your tax liability is essential for making informed decisions and avoiding unpleasant surprises at the end of the financial year.

In this article, we go over some of the key aspects of stocks and shares investing that you should be aware of.

Capital Gains Tax

One of the primary taxes you’ll encounter as an investor is Capital Gains Tax (CGT).

This is levied on the profit you make when you sell an asset that has increased in value.

The rate of CGT varies depending on your Income Tax band.

  • Basic Rate taxpayers pay 10 per cent
  • Higher/additional rate taxpayers pay 20 per cent

It’s essential to note that you have an annual tax-free allowance, known as the “annual exempt amount,” which for the tax year 2023/2024 is £6,000.

It is also important to note that this was reduced from £12,300 in 2022 and will drop again, in 2024, to just £3,000.

Any gains above this threshold are subject to CGT.

Income Tax

Dividends received from your investments are also subject to Dividend Tax.

The first £1,000 you receive in dividends is tax-free, thanks to the dividend allowance.

Again, this was reduced from £2,000 last year and will be reduced to £500 at the end of the current tax year.

Beyond that, the tax rate depends on your Dividend Tax band:

  • 75 per cent for basic rate taxpayers
  • 75 per cent for higher rate taxpayers
  • 35 per cent for additional rate taxpayers.

These have risen from previous years, so it is important to take these new figures into account during your annual tax return.

Consequences of non-compliance

Failure to accurately report your Capital Gains or dividend income can result in severe penalties and financial repercussions.

HM Revenue and Customs (HMRC) can charge you interest on the unpaid tax from the due date of the payment until the date it’s finally paid.

Additionally, you may incur a late filing penalty, which increases the longer you delay.

In extreme cases, HMRC can launch an investigation into your financial affairs, which can be both time-consuming and costly.

Moreover, ignorance of the law is not an acceptable defence. It’s your responsibility to be aware of the tax obligations associated with your investments and to comply with them fully.

Final thoughts

Investing in stocks and shares can be a lucrative venture, but it’s crucial to be mindful of the associated tax implications.

By understanding the ins and outs of CGT and Income Tax, you can better plan your investments and potentially minimise your tax liability.

Always consult a tax professional for tailored advice, especially if you have a diverse or complex portfolio.

Remember, being proactive about your tax obligations is not just good financial practice; it’s a legal requirement.

Speak to our accounting team to learn more about reducing your tax obligations.

Posted in blog, Business, Capital Gains Tax, HMRC, SME's, Tax.