Tax is a complex subject. MoneyBlog, at present, relates only to personal finance and as such we deal here only with personal tax.
Income tax is, as the name suggests, tax you have to pay on your personal income. Not all types and sums of income are taxed and how much you have to pay depends on how much income you earn. As a rule, the more you earn, the more you pay.
Income Tax Summary Table
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Income you have to pay tax on includes:
- your salary – income you earn from employment
- profits you’ve made if you’re self-employed
- most pensions including state pensions, personal pensions or those provided by companies
- rental income – if you let a property or a room in your house
- income from a trust
- interest on savings
However, HMRC allows most of us a tax free allowance on most types of income. The following sums are all exempt from tax:
- Trading allowance – the first £1000 of profit if you’re self-employed
- Personal allowance – the first [sv slug=”personal-allowance”] you earn from employment, unless you’re an additional rate tax payer.
- the first £1000 of profit you earn if you’re letting a property
- income from Individual Savings Accounts (ISAs)
- the first [sv slug=”dividend-allowance”] of dividends you receive from company shares
- premium bonds and national lottery wins
- ‘winnings’ from gambling
Capital gains tax is a tax you pay when you have sold (also known as ‘disposing of’) something (an ‘asset’) that has risen in value since you bought it. Typical examples include company shares on the stock market and property.
Important note: It’s the GAIN you make that is taxed, not the amount of money you receive from the sale.
For example, if you buy some shares for £1000 and you sell them a year later for £1500, £1500 – £1000 = £500.
Capital gains tax is payable on the £500 gain, not on the £1500 you received.
Capital Gains Tax Rates
For higher and additional rate tax payers:
- 28% on residential property
- 20% on all other chargeable assets
For lower rate tax payers:
- 10% on gains that fall within the lower rate tax band
- 20% on anything above that
Capital Gains Tax-Free Allowance
As with most things, HMRC does grant us all a tax free allowance.
For higher and additional rate tax payers, the tax-free allowance for this financial year (18/19) is £11,700.
Dividends are taxed in accordance with your income tax band, with two exemptions:
- HMRC grants us all a tax-free allowance on the first [sv slug=”dividend-allowance”] we earn from dividends. So if the total annual income you make from dividends is less than £2000, no tax is payable.
- Additionally, dividends paid on shares owned in a stocks and shares ISA are not taxable, no matter how much the total is.
Other than that, dividends are taxed according to your income bracket.
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How To Work Out The Tax You Need To Pay On Your Dividend Income
First, calculate your total income from salary etc.
Then add your dividend income on top of this.
Dividend income is then taxed as follows:
Basic rate – [sv slug=”basic-rate-div”]
Higher rate – [sv slug=”higher-rate-div”]
Additional rate – [sv slug=”additional-rate-div”]
Note – you may pay tax in more than one tax band.