FAQ for Tax in the United Kingdom

FAQ for Tax in the United Kingdom

The UK tax year has just ended, 5 April 2021. So this is a good time to talk about taxes on investments as they affect those of us using Trading 212. Some information about ISAs is also here. Taxes on dividends and capital gains in the year 6 April 2020 - 5 April 2021 need to be computed and paid by 31 January 2022.

There is already a lot of information about UK tax in our community forum. However, this short FAQ may help to bring a lot of information into one place. It contains links to other posts for those who want to learn more. All this information can be found on HMRC pages about Tax on savings and investments, but sometimes it is buried amongst more than you really need to know. Here are the things that are going to affect UK investors making the types of investments that are available on the Trading 212 platform. The information here is not professional tax advice, but rather personal experience of community members in completing their own tax returns. It has already been proofread by some others and can be corrected if any errors are discovered or HMRC rules change. Please let me know if you think anything is unclear, wrong, or you would like other information. Trading 212 per se has not participated in writing this post.

When figures are used below for illustration they are for the 20-21 tax year. Some of these change year to year. Rates and thresholds for a tax year can be found here and here.

General

What is the UK tax year?

The UK tax year is from 5 April one year - 6 April next year.

Point to note: a dividend is taxable according to the tax year in which its official payment date falls (which may be several days before you receive it from Trading 212). This means that you cannot rely only on the export of data from the History covering the period 5 April one year - 6 April next year. You may need to look at what has been happening some days after 6 April as dividends with official payment dates before 6 April come in. You can look up the official payment dates in many places, One such for US shares is nasdaq.com.

Does Trading 212 pay any of my taxes for me?

No. The only taxes that are deducted by your broker are transaction taxes (like the 0.5% stamp duty when buying UK shares, or FINRA fees when selling US shares), and foreign withholding taxes on dividends. The most common of these is the 15% tax that is withheld on US shares dividends (reduced by US-UK tax treaty from the standard 30% because Trading 212 will have completed for you a W8-BEN form.)

It is not realistic for a broker to figure your taxes for you. Consider an investor who buys AAPL shares on two platforms. Neither platform knows the investor’s average price for AAPL shares and so cannot figure out what is the gain when they are sold. A broker also does not know your total income and so cannot know at what rates you dividends will incur tax. HMRC has aspirations to make things more automatic through its “making tax digital” programme. But for now, tax preparation is something each investor has to spend a fair amount of time upon, or hand-off to an accountant. There does exist commercial software that can help when figuring taxes. But many people find that the self-assessment site of HMRC, plus some work with a few spreadsheets, is all they need.

What information will I need to do my taxes?

To complete your tax return and figure your taxes you will need to know many things, such as your wages and PAYE tax taken off. But here we focus on investment income. As regards that you need:

  1. Your total dividend income in the tax year. This should be the gross amount, before any withholding taxes have been deducted,

  2. The total of withholding taxes deducted. These totals should be figured separately for each foreign source (US, Ireland, France, etc) since the allowable foreign tax credit rates may differ. You can look up the allowable rates on the HMRC pages at.

  3. Knowledge of dividend payment dates and the exchange rates pertaining those days. E.g. AAPL paid a gross dividend of $0.205 per share on my 100 shares of $20.50 on 11/02/21. The exchange rate that day was $1 = £0.7718. So my gross dividend was 20.50 x 0.7718 and 15% of that was withheld as US tax. A good way to find exchange rates on days throughout the tax year is with a Google sheet and the command

=GOOGLEFINANCE("USDGBP", "price","06/04/2020","05/04/2021")

It is fairly easy to produce everything you need from the csv export of Dividend and Order data from the Trading 212 history, in combination with some Google functions, such as above, and some lookup of official dividend dates.

  1. The cost amounts and proceeds amounts for all shares you have sold during the tax year, together with dates bought and sold so you can apply the correct matching rules to figuring your cost basis and gains (or losses).
When must I tell HMRC about my investment income?

The self-assessment tax return is due by 31 January following the end of the tax year. So you have almost 10 months to assemble data and complete your return.

How do I do that?

If you are already completing a self-assessment tax return then you will enter all dividend and capital gains income there.

If you are not yet completing a self-assessment tax return you may need to register to do that on the HMRC web site. You will need to if you have dividend income above £2,000, or have made capital gains net of losses in excess of £12,300, or have gains before losses in excess of £49,200, or wish to carry forward losses.

When are taxes due?

HMRC operates a system of advance payments (called “on account”) and a catch-up payment (called “balancing payment”). Consider taxes for the year 6 April 2020-5 April 2021. Here are the key dates, with bold for the items concerned with the 20-21 tax.

  • by 31 January 2021 tax return for 19-20 to be filed. Balancing payment for 19-20 and on account payment for 20-21
  • by 31 July 2021 on account payment for 20-21
  • by 31 January 2022 tax return for 20-21 to be filed. Balancing payment for 20-21 and on account payment for 21-22

The “balancing payment” can be a refund to your bank account if the “on account” payments have been too much, or it may credited against the following year’s “on account”.

How do I pay?

The easiest way is by bank transfer directly to the HMRC bank account. The payment details are given in your self-assessment account.

ISAs

Are any profits in an ISA ever reportable or taxable?

No. You do not need to tell HMRC about anything happening in your ISA. If you deposit £4,000 and are lucky enough to see it grow to £400,000, there is no UK tax to pay. Not then, or when you someday withdraw it. The only taxes you will pay when investing in the ISA shelter are transaction taxes (like the UK stamp duty on UK shares) and any foreign dividend withholding taxes.

But beware. The tax shelter is only for UK taxes. If you move abroad and/or become a taxpayer in a different country the profits in your ISA account will be taxed by that country as in any normal account. This may create a lot of work, as you may be required to figure the original cost basis of your shares for capital gains tax in the new country. People usually cash in their ISAs completely before moving abroad.

How much can I add to my ISA each year?

Currently you can add £20,000 each tax year to one stocks and shares ISA.

What are the rules about the number of ISAs I may have?

You can have several S&S ISAs open and can trade in them, with different providers whenever you like. But you can only add new money to one S&S ISA each tax year. So you have to decide which of the providers will get your new money in this tax year. HMRC will know if you try to deposit to more than one, as the ISA providers send HMRC the taxpayer identification numbers of those who have put money into an ISA with them,

Must I open a new ISA with Trading 212 at the start of each tax year?

No. All your ISA with Trading 212 is considered to be one pot. You may be asked to reconfirm that you are eligible for an ISA, but there is no sense in which some portion of the money/shares is permanently attached to a particular tax year. If you decide to transfer out during year in which you have already made a partial contribution of your £20k allowance it can become complex. Usually, one would only transfer out the entirety of an ISA.

Is the Trading 212 ISA flexible?

No. You cannot withdraw money and then put it back in later. For example, suppose you deposit £11k. It grows to £22k. You take £12k out. You can only put £9k back in, since that is your remaining allowance out of £20k.

Capital Gains Tax (Invest account)

What is the annual exempt amount?

The annual exempt amount is currently £12,300. This means that you do not pay capital gains tax if your realised net gains are no more than £12,300. If your gains are more than £12.3k you pay tax on the gain above this amount. This allowance cannot be carried over from one tax year to the next. So care is needed to make sure it is well-used.

How do I figure my capital gains tax liability?

You add up all the sales which have resulted in gains. You add up all the sales that have resulted in losses. Everything must be figured in GBP. You will need to know the original costs to compute the gains and losses. Make sure to read below “What are the share matching rules?”

Suppose the gains add up to G. Suppose the losses add up to L. You are taxed on G-L-12,300 if this is positive, and have 0 tax if this is negative. The tax rate depends on the tax band in which your most highly taxed other income falls. If this is basic rate (other income <50k) the tax is 10%. If this is higher rate (other income >50k) the rate is 20%.

You do not want to waste the tax free allowance. Suppose you had G=30k, L=20k. You will owe not tax since G-L-12300< 0, but you will have wasted some of the allowance. It would be better to declare losses of just 17700. Now 30000-17700-12300 = 0. You do not declare 2300 of the losses, but prefer to wait to declare them in a subsequent year. Losses can be declared up to 4 years after they actually were realised.

What about shares priced in other currencies?

Suppose I bought 100 AAPL at $200 per share when $1 = £0.7200. Later, I sell then for $210 per share when $1 = £0.7100. My gain is

(100 x 210 x 0.7100) - (100 x 200 x 0.7200) = 510.

This is just to make clear that it is a rookie mistake, and incorrect, to compute the gain as the USD gain converted to GBP, as in

Incorrect: 100 x (210 - 200) x 0.7100 = 710.

In terms of the information shown on the Trading 212 platform 510 is “Return”, 710 is “Gain/loss”, and 510-710= - 200 is “FX impact”. [Note. Will need to look a bit more into this. It is not yet clear to me if the “Return” figure in the app is gross or net of fx fees that have been (will be) paid on purchase (sale).]

Can I deduct currency conversion fees from my taxable profits?

Unfortunately HMRC do not allow currency conversion fees to be a deductible cost. The only allowable costs are broker commissions, of which Trading 212 has none.

So suppose I bought 100 AAPL at $200 per share when $1 = £0.7200. Later, I sell then for $210 per share when $1 = £0.7100. My gain is

(100 x 210 x 0.7100) - (100 x 200 x 0.7200) = 510.

But since Trading 212 has a 0.15% fee, my actual cost would have been 100 x 200 x 0.7200 x 1.0015 and actual net sale proceeds 100 x 210 x 0.7100 x 0.0085, for an actual gain of

(100 x 210 x 0.7100 x 0.9985) - (100 x 200 x 0.7200 x 1.0015) = 466.04

Unfortunately, HMRC require that I declare my gain as 510.

There remains a question of what exchange rate to use. For capital gains it seems reasonable to use the rate recorded in the trade History or Contract note from Trading 212, excluding any fx fee. For dividends one can use the rate from Googlefinance for the day of payment. From HMRC’s perspective the key is consistency of approach over time.

What are the share matching rules?

When you sell shares you need to figure out how much they cost to buy so you can figure your gain or loss. Usually you will use the average GBP cost per share over all past purchases of presently owned shares.

However, things are trickier when you have bought and sold shares in the same company on the same day, or have sold them and then repurchased others in that company within 30 days. Read this HMRC page and the section about How to identify the shares disposed of.

This tool may help
CGTCalculator online capital gains calculator for UK share trades

What about CFD gains and losses?

See HMRC pages about CFDs. There is a nice example of how to figure this. Overnight interest is a deductible expense. Someone who makes lots of trades will have many lines of transaction to report. When completing a self-assessment tax return there is an option for attaching your own printout of transactions.

HMRC pages about selling shares
HMRC pages about CFDs

Dividend Tax (Invest account)

What is the annual dividend allowance?

Your dividend income is always taxed as your highest slice of income, like the top layer of a cake, sitting above your other income from wages, bank interest and renting our property. So if you have wages and bank interest totalling £47k and dividends totalling £4k, then if the higher rate band starts at £50k, you will have £1k of dividends falling in the higher rate band. Currently the tax rates in the basic, higher and additional rate bands are 7.5%, 32.5% and 38.1%. The additional rate band starts at £150k.

The dividend allowance is currently £2,000. Unfortunately, it is applied to your lowest taxed slice of dividend income. For instance, if you have wages and bank interest totalling £47k and dividends totally £4k, you would have £3k dividends in the basic rate band (up to £50k) and then £1k dividends in the higher rate band. The dividend allowance will apply to the lower taxed slice, reducing the tax on the £3k in the basic rate band to 7.5% on £1k. You will additionally owe 32.5% on the £1k that remains in the higher rate band.

How do I figure my dividend tax liability?

You add up the GBP value of all the dividends whose official payment dates fall in the tax year. Your dividend income will be taxed as your highest slice of income, with the lowest slice of £2000 being given a nil rate tax. This means that some of your dividends will be taxed 0%. Others may be taxed 7.5%, and some 32.5% or 38.1%, depending on where they fall. But so far as filling in your self-assessment form is concerned, you will enter separate totals for the sum of dividends from UK companies, and sum of dividends from different foreign sources. Typically, Vanguard and iShares ETF dividends are Irish source. US companies are, of course, US source. You will enter each on a separate line. For each country there is a maximum amount of foreign tax credit that can be claimed against withholding tax, e.g. 15% for both Ireland and US.

Where can I find the official payment dates of my dividends?

This is one place where the Trading 212 History is lacking. It only records the date you received the dividend. But you are taxed on the basis of the official payment date and with the exchange rate applicable on that date. One way to find payment dates is to look them up one by one (say, on nasdaq.com for US dividends). Or you can automate this by paying for a service like dividendmax.com. Or you can, for free, create a Yahoo portfolio, which will display for you dividend dates that you can scrape into a spreadsheet through the year. Though Yahoo has a bug and reports all such payment dates one day too early. At least it is a consistent mistake.

What is foreign tax credit?

Suppose you have received £1000 worth of gross US dividends. You will have paid US withholding tax of £150. Suppose your US dividends fall in the higher rate band (income above £50k) and so are subject to UK tax of 32.5%. You will be able to take a credit and consequently pay HMRC only 320-150.

If your dividends had been subject to UK 7.5% tax then the 15% paid to the US will wipe out all of your UK liability. To find what tax credit you can take you should compute your tax bill both with and without the US dividends. The foreign tax credit you can take in the minimum of the difference between these two figures, and the US withholding tax you have actually paid.

The self-assessment form allows you to order your foreign dividends as slices in your taxable cake. Most times this will make no difference, but it might be useful if you had one set of £1000 foreign dividends for which the allowable tax credit is 10% and another set of £1000 for which it is 15%. If your other income is £49000, and the threshold for higher rate tax is £50k, then £1000 of your dividends will be taxed at 7.5% and £1000 at 32.5%. You would like those for which the available credit is 15% to the ones taxed at 32.5%, rather than the other way around.

Warning. Sometimes the foreign tax credit you are allowed to take is less than that which has actually been withheld. For example, Ireland withholds 20% from Medtronic dividends. But the UK-Ireland agreement only allows for a 15% tax credit. So if your UK dividend tax rate if 32.5% then £100 of MDT dividend will incur tax of £20 (Ireland) and £(32.5-15)=16.5 (UK).

What about ETFs?

Taxation of ETF dividends is more complicated than most people realise. Although an accumulating ETF pays out no dividends to investors, it is reinvesting dividends internally, and these are subject to UK dividend tax. To learn the amount of dividend reinvested you need to look on the issuer’s web site. For example, take iShares SWDA. In the Literature section you see a file called iShares reportable income 2020. Clicking there opens a spreadsheet. On line 57 we see that IE00B4L5Y983 had $0.9792 “excess of reportable income” (ERI) deemed paid 31/12/2020. This amount needs to be converted to GBP and entered on the tax return for 20-21. The exchange rate on 31/12/20 was 0.7541. So if I had 1000 shares I would have a dividend to declare of 1000 x 0.7541 x 0.9792 = £738.41. However, since this is new money I have added to my purchase cost I can increase my cost basis by £738.41 when someday I come to sell the shares.

One might hope this calculation could be side-stepped by investing in distributing ETFs. But they also can have ERI. Take Vanguard’s popular VUSA. Look at Vanguard’s page
Tax return information, go to he drop-down item called “Report to Participants (current and previous years)” and click on page VF plc Excess Reportable Income: 30 June 2020. We read on the second page that Vanguard S&P 500 UCITS ETF had “Excess of reportable income over distributions” of $0.0394 per share deemed paid 31/12/20. This is in addition to the 4 quarterly paid dividends that are also listed. This 5th ERI dividend should be reported the same way as we did above for SWDA.

OEIC funds?

Open ended investment companies (OEIC) are a type of investment not yet offered on the Trading 212 platform. However, they are very popular with investors. Typical names are Vanguard Lifestrategy 80% Equity, Fundsmith Equity and Lindsell Train Global Equity. This stub is a reminder that something will need to be written if Trading 212 were ever to start offering this type of investment. Like ETFs they present another set of fiddly tax wrinkles, particularly as regards the issue of “equalisation” and dividends in accumulating funds.

HMRC pages about dividend tax

Further information

Where can I find more information?

See HMRC pages. HMRC also has a community forum where answers to many tax questions can be found https://community.hmrc.gov.uk/forums/customerforums/

HMRC is pretty good about responding (in day or two) to questions put to them via Facebook messenger. HMRC - Home | Facebook

There are also some existing threads in this community forum that are interesting:

Links to be added

37 Likes

Top work, thank you @Richard.W, this must have taken a fair amount of time. Lots that people can learn from this post, whether a novice or experienced investor.

3 Likes

Great work @Richard.W this will help a lot of people out including myself.

Correct me if I’m wrong but I understand that you do not need to declare any capital gains on a S&S ISA or any ISA for that matter.

You are correct. I hope this question is already addressed in the section

To avoid any doubt I have added “You do not need to tell HMRC about anything happening in your ISA.” Thanks for the suggestion.

@Richard.W you’re an absolute legend. I hope @Team212 can change your title to Yoda :+1:

7 Likes

thanks Richard, the post was very helpful, one question I’m struggling with right now though is this one:

“is there any advantage of paying my capital gains tax early or should I be like the majority of the population and wait until the last minute to pay it?”

the answer I’m not finding easy, there is a list of HMRC repayment interests here and capital gains is mentioned at 0.5%:

So it seems there is a repayment interest which I guess is yearly on early payments, (no info on this anywhere?) I know I’ve seen this referenced before with corporation tax where it doesn’t kick in until 6 months after the company end but not sure how the repayment interest works when it comes to capital gains tax and there is very little information around about it.

eg: you work out you owe 5k in capital gains tax, you could file the return and pay it today but you will lose all the opportunity cost for the money up until Janary next year when you could have waited. however if you do pay the 5k early then it appears that HMRC will pay you a repayment interest of 0.5%? how does that work? I might have to call them.

thanks if anyone can help on that.

minor point but this is for online return which what pretty much everyone is doing but if you want to do a paper return it must be sent in by 31 October 2021

I am not aware that HMRC pays any interest for early payment of income tax or capital gains tax. Early payment interest is for corporation tax.

Capital gains tax is currently figured and due once a year, along with the self-assessment payment that is due at 31 January. There is no advantage in paying early, since no interest is given. However, you can be charged for late payment and receive interest for overpayment.

Very helpful as these questions are asked all the time.

I wasn’t aware either until I saw it written on their website, I just had a conversation with them and it went like this:

me: Hi, is there any repayment interest if I pay my capital gains tax early?

them: Hi, no we wouldn’t pay you interest if you settle early

me: Ok, interesting, it’s written on your website here that there is a repayment interest of 0.5% for capital gains tax, maybe it needs updating?

them: There are circumstances where we would pay that for Capital Gains but not the one you described

me: Can you describe one of those circumstances? just so I know for future reference

them: Interest would be paid if a capital gains liability was overpaid and later refunded, eg: a return was submitted and later amended resulting in a refund of CGT.

So that’s it, wish they would just write that on the website to save confusion. I guess I’ll be like everyone else then and put off the payment as there is no advantage at all paying early I can see.

1 Like

Hi Richard,
If I understood correctly then one is not required to report any profits from ISA account for taxes to HMRC. However, I was just wondering about a situation where capital gains from investment account is lower than the allowed limit of 12300 GBP but exceeds this value when gains from ISA account is also taken into consideration. Likewise, how dividend taxes are exercised in similar situation.
Thanks

The ISA account attracts no UK taxes under any circumstance. The taxes due on dividends and capital gains in your Invest account are completely unaffected by whatever happens in your ISA account.

1 Like

Top work @Richard.W . In the flexible ISA example, what happens when I withdraw all of 22k? Is my allowance still 9k? Or is it 20k ( because I’ve withdrawn everything including my original 11k investment) ?

None of the above i think is the answer.

In a flexible isa, what you take out is added to what you can put in for that tax year.

@Dougal1984 is correct. Note that he mentions an important limitation: that the money must be replaced during the same tax year that it is taken out. If you withdraw, the tax year ends, and then you replace, the replacement will not actually count as a replacement, but as a new deposit for that next tax year. Remember, Trading 212 ISA is not flexible.

2 Likes