Tax paid on shares

The first publicly traded company emerged in 1611. This was the Dutch East India Company. For the first time, the general public could buy shares in a company banking on its success. For over 100 years the company rewarded investors with dividends. These dividends were first paid in money but were later also paid in stock. As the company was used to trade with South and Southeast Asia, people received spices and cloves as dividends. Or, investors in the company could sell shares in the business for profit if the value of the company and therefore the share price rose. This is how stock trading began.

Not all companies pay dividends, as was the case with the Dutch East India Company when they stopped paying dividends in 1782. Some sources such as Business Insider claim that the company was one of the most successful businesses ever. They state it was worth $7.9 trillion in modern dollars. However, this has been rigorously denied by other sources. Whatever the case may be, when the company dissolved on 31 December 1799 it showed that no company and no company shares are bulletproof. No matter how rich, powerful, and successful it is or once was.

In the 1980s Hollywood made the stock market seem exciting, with images of ravenous suited traders screaming, and bustling to trade the best stocks. In more modern days stock trading is far less hectic and open to almost everyone. People can buy shares from the comfort of their own homes, or on the move, using online trading platforms. However, when selling shares for profit, or when you receive dividends, you may need to pay tax.

This article will explain when you need to pay tax, the exact type of tax you need to pay, and how much tax you need to pay. It will also explain any tax allowances when it comes to shares.

You normally have to pay a small transaction tax of 0.5% any time you buy shares. When this is done electronically this is called Stamp Duty Reserve Tax. Electronic shares are bought using a computerised register of shares and shareowners known as the CREST system. Stamp Duty Reserve Tax is automatically deducted when purchasing shares. So you do not need to worry about calculating this at the end of the tax year.

However, if you buy shares off the market - meaning they are traded outside the CREST system, you pay Stamp Duty at the end of the tax year. To do this you are required to provide written notification to HMRC. Deatils should include:

• Buyer and seller details
• What and how many securities have been transferred
• Any relief or exemption, or both, claimed
• Details of the payment or other exchange, including monetary value, made
• A reference number, chosen by you, so HMRC can identify the payment

The HMRC contact details for when you pay Stamp Duty for off-market purchases are:
[email protected]

BT - Stamp Duty Reserve Tax
HM Revenue and Customs
BX9 2AS
United Kingdom

You will also be required to pay the 0.5% Stamp Duty Reserve Tax on shares purchased using a stock transfer form. This is only if that transaction is over £1,000. It is also worth noting that the price you pay is rounded up to the nearest five pounds, so you may pay slightly more than 0.5%. In some cases, if you choose to have your shares transferred into ‘depositary receipt schemes’ or ‘clearance services you will instead be charged 1.5% for Stamp Duty Tax.

According to Gov.uk there are specific transactions you pay tax on. For example, taxes are due when you buy:

• Existing shares in a company incorporated in the UK
• An option to buy shares
• An interest in shares, for example, an interest in the money from selling them
• Shares in a foreign company that has a share register in the UK
• Rights arising from shares, for example, rights you have when new shares are issued

However, in some scenarios, you are exempt from paying tax when making stock transactions. For example:

• You are lucky enough to be given shares for nothing
• You subscribe to a new issue of shares in a company
• You buy shares in an ‘open ended investment company’ (OEIC) from the fund manager
• You buy units in a unit trust from the manager

You may have to pay Capital Gains Tax if you make a profit from selling shares. There are certain shares you may need to pay Capital Gains Tax on when you sell them for an income. This includes:

• Share that are not part of an ISA or PEP
• Units in a unit trust
• Certain bonds (excluding Premium Bonds and Qualifying Corporate Bonds)

In contrast, there are some instances where you do not need to pay towards Capital Gains Tax. For example, if you pass shares on as a gift or a charitable donation.

You also do not need to make Capital Gains Tax payments when you get rid of:

• Shares in an ISA or PEP
• Shares from Share Incentive Plans (SIPs) from an employer
• UK government gilts (including Premium Bonds)
• Qualifying Corporate Bonds
• Employee shareholder shares - no Capital Gains Tax to be paid until you make over £100,000 during your lifetime

The amount of Capital Gains Tax you are required to pay depends on how much you earn in capital gains. For example, the Capital Gains Tax allowance means you do not pay tax if your earnings are less than:

• £12,300
• £6,150 for trusts

You can add this to your taxable income which can often prevent you from paying any Income Tax at all. For example, you pay Income Tax depending on your Income Tax band. The initial Income Tax rate for basic rate taxpayers is either 19% in Scotland or 20% in the rest of the UK. However, if your income is less than £12,570 you do not have to pay Income Tax. This is because there is an annual tax-free allowance.

You can also add your Capital Gain Allowance to your other income. So, potentially combining both allowances you could be tax exempt if you earn less than £24,870.

Above this, Capital Gains Tax is charged at a rate of 10% for a basic rate taxpayer. Or 18% for residential property. Capital Gains Tax is charged at 20% if your total income is above the basic rate. Residential property gains in this bracket is charged at a 28% rate.

You may have to pay Dividend Tax if you receive dividends from company shares. However, much like with other income streams there are allowances. For example, if your dividends fall within your personal allowance they will be tax-free. Dividends from ISAs are also tax-free.

You also have an annual exemption on dividend income. This allowance is £2,000. So if you earn less than £2,000 you do not have to pay Dividend Tax. You can also combine this annual allowance with your Personal Allowance and CGT allowance. This further £2,000 means it is possible to earn £26,870 before paying income tax.

However, out-with allowances, the amount of tax you pay again depends on your Income Tax band. Dividend Tax rates are shown below:

Your tax-free allowance or Personal Allowance is how much you need to earn before paying tax. If you earn less than £12,570 per tax year, you do not have to pay income tax. If you are paying Income Tax whilst earning less than the Personal Allowance, you should be able to claim back overpaid tax.

Be aware that Scotland has different tax brackets than the rest of the UK.

As early as 1611 the general public has been able to buy a percentage of a company in the form of shares. The first public company was the Dutch East India Company which saw a dramatic rise and fall in its time.

In the 1980s films like Wall Street and Trading Places brought the hectic world of stock trading to the masses. Now stock trades can simply be made from home over the internet. When purchasing shares you usually have to pay a transaction tax of 0.5%. When done under the CREST system this is automatically deducted. However, if you buy shares outside of this system you are required to pay HMRC at the end of the tax year.

If you use a stock transfer form to buy shares of over £1,000 you are also charged 0.5%. There is often a 1.5% tax charge if shares are transferred into ‘depositary receipt schemes’ or clearance services.

Also, you will pay gains tax on shares if you profit from selling them off. This is called Capital Gains Tax. You do not have to pay CGT on:

• Shares in an ISA or PEP
• Shares from Share Incentive Plans (SIPs) from an employer
• UK government gilts (including Premium Bonds)
• Qualifying Corporate Bonds
• Employee shareholder shares - no Capital Gains Tax to be paid until you make over £100,000 during your lifetime

There is also an annual CGT exemption. This means you do not have to pay tax on CGs of less than £12,300, or £6,150 for trusts. You can also add these allowances to your total income including your Personal Allowance for substantial discounts.

Also if you own company shares you may receive dividends. In some cases, you will have to pay Dividend Tax. If the amount falls within your Income Tax allowance you will not have to pay any tax. However, if you earn more than that you will have to pay tax, but only if your dividends amount to more than £2,000. The percentage you pay on these earnings depends on what Income Tax category you are in. The lowest is 8.75% and the highest is 39.35%.

Income tax rates differ very slightly between Scotland and the rest of the United Kingdom. Percentage rates over the tax year range from zero percent to 45 and 46% for the highest earners. However, if you combine all tax allowances from shares, and your personal allowance, you can substantially reduce your tax bill.