If you’re invested in a fund that has 60% or more of its money invested in Bonds (a technical term for a loan issued by a company or government that pays interest) and/or held as Cash, like Personal Portfolio Defensive Fund, the income is classed as interest.
Helpfully there is an allowance called the Personal Savings Allowance for interest that may be available to you reducing the amount of tax you need to pay. Like many other allowances this applies per person, per tax year.
You’re a basic tax payer and your investment is made up of 60% or more in bonds or cash. £50 of income from this investment is attributable to you.
This £50 is classed as interest.
Because you’re a basic rate taxpayer Government allows you to receive £1000 from interest before you need to start paying tax on it. This means the £50 you’ve received will not be taxed.
If you’re invested in a fund that has less than 60% of its money invested in Bonds and/or held as Cash, like Personal Portfolio Cautious Fund, Personal Portfolio Balanced Fund, Personal Portfolio Ambitious Fund and Personal Portfolio Adventurous Fund, the income is classed as dividends.
Similar to interest there is an allowance you can use to reduce the amount of tax you pay, for dividends the allowance is the Dividend Allowance.
You’re a basic rate tax payer and your investment is made up of less than 60% in bonds and cash. £2500 of income from this investment is attributable to you.
This £2500 is classed as dividends.
The Government allows you to receive £1000 in dividends before you start need to pay tax on it. In this example the first £1000 of the dividends is not taxed but you may need to pay tax on the £1500 that is over the dividend allowance.
In summary, income tax may need to be paid when you provided an income from an investment, but there are various allowances in place to limit the amount of tax you pay.