Investment and tax – How it works for you

Know how much tax you need to pay for your investment income.

17:47 13 March 2013

More and more people are now investing money for their future. If you’re one of them, one of the things that you need to understand is the applicable tax on your investment income. This is very different compared to income tax on your earnings as an employee.

Income tax is applicable on the interest that you receive on savings and on your share dividends. Investment made for capital growth may also be subjected to Capital Gains Tax.

Different investment incomes are not taxed the same rate. There are entitlements, specific rules, and exemptions that apply based on the kind of investment and earnings that you have. There are also investments options that are tax-free like cash and shares & stocks ISAs.

The following are some of the investment income that are liable for tax:

• Interest from most savings.

• Income from a pension.

• Rental income.

• Dividends from shares.

• Capital gains from sale of property or sale of shares.

There are also some instances where you’ll be exempted from paying taxes. If you earn less than the set “Personal Allowance” which is around £8,105 for people under 65, you will not need to pay tax.

Another important thing that you need to learn is that income tax is progressive. This means that you pay more tax if you earn more.