Mavis from Eastbourne writes:
Hi Mavis. Thanks for your e-mail. We love stories like this. We love hearing from people who crush the stereotype of what a stock market investor looks like.
And well done on your winnings! I’m not sure how much capital you’re using but there’s no question you’re making considerable profits!
So let’s talk about this.
First off, while you’ve called them ‘winnings’ because the stock market can seem like a game sometimes, unfortunately HMRC doesn’t see it that way. They consider buying and selling shares exactly the same as buying and selling houses or bread. Unlike true gambling winnings, which, for the time being at least, are tax free.
How much tax you have to pay depends on a number of things.
Have you traded inside a stocks and shares ISA wrapper?
How much of the income was yielded from the sale of shares?
Do you have other income besides your share dealing activities?
How much of the income was yielded from dividends you were paid because you owned the shares?
The answers to each of these questions will affect the amount of tax you need to pay.
HMRC taxes share dealing activities in a couple of different ways:
Capital Gains Tax
If you make a profit when you sell shares, this is called a capital gain. And you have to pay capital gains tax on capital gains. This is currently set at 20%. HMRC does give every individual a capital gains tax free allowance which is currently £10,000 per year.
So for the first £10,000 you make from sale of stock, you don’t have to pay tax and you therefore don’t need to fill a tax return or declare it in any way. So in your case, Mavis, if all of your profit was made this way, you may, so far, not have to pay tax.
Dividends are currently taxed according to your income bracket. So the more personal income you make, the more of your dividends the tax man takes away for himself. But HMRC currently gives each individual £2000 tax free allowance on dividends. So the first £2000 you earn from dividend payments do not attract any tax.
However, after that, they’re taxed in the same bracket as your regular income.
Now, if you’ve traded inside an ISA wrapper, you’re totally off the hook. No tax. No matter how much you made and by what means.
So in summary, yes, you may have to pay taxes on your profits. How much will depend on how you invested and where exactly the money came from.
We hope that helps.
Also see our Dividend & Capital Gains Tax Page
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