Paying Tax on Funds

So here’s where funds get complicated. They can make you money in three ways: Through interest, dividends and capital gains. And yes, there are different tax rules for each. Pens at the ready!

The 3 ways to make money

Interest income is tax-free up to your personal saving allowance (PSA), which is £1,000 for basic-rate tax payers and £500 for higher-rate tax payers. Any interest earned above this will be taxed in the same way as your salary. Not sure where you sit on the income tax pay scale? Find out here. 

Dividend income is tax-free up to £5,000 a year. Any dividends earned above this will be taxed depending on your total yearly income (from salary and any other taxable earnings you receive), here are the bands… 

What counts as taxable income? We have a guide for that. 

Capital gains made when you sell your fund is tax-free up to £11,300 a year. Any capital gain above this will also be taxed depending on your income band. 

MOXI top tip: Capital gains tax is applied to many things – funds, shares, jewellery, second homes. To check you’re within your tax-free allowance, you’ll need to add up all your capital gains.

How do I work out if and when I owe taxes?

Interest and dividends payments are paid to you regularly (usually twice a year) and, if over your allowance, you have to pay tax on these in the same year. You’ll only pay capital gains tax at the time of selling the fund. 

Tax on Interest and Dividends

Your fund’s annual statement will break down the interest and dividend income you receive so check these against your tax free allowances. If you’re within the allowance, congrats, you’ve got nothing to do. Sit back, relax and pop on the Kardashians (no judgement). If you’re above, well, you’ll need to handover some of your income to HMRC (you can still watch Kim and Kanye, natch). 

MOXI top tip: Keep your annual statements in a safe place because you may need them if your taxes are ever reviewed. If they’re sent by post, take a photo and email them to yourself. 

Tax on Capital Gains

Some good news: You only need to work out your capital gain if you’re selling the fund. Plus, you only pay tax on any ‘gain’ over £11,300. The gain is the difference between the price you bought and the price you sell the fund at. So say you buy 10,000 units in a fund at £1 - which is a £10,000 investment - and years later sell at £5 per unit, you’ll receive £50,000. Your gain? That’s £40,000 (£50,000 return minus £10,000 initial investment). You can deduct any broker fees, say £1,000, from this as well as your tax-free allowance, £11,300. Now you’re at £27,700 which will be taxed as a capital gain. For a higher-rate tax payer this is a bill of £5,500. We feel your pain. 

Is there any way to avoid paying tax on funds?

Well, if there’s a good chance you’ll go over your tax-free allowances you might want to open a Stocks & Shares ISA which protects your investment income from being taxed. BUT this limits you to investing £20,000 each tax year (from April 6th to April 5th the following year).