How are my investments taxed?
The information provided in this document is based on our understanding of the laws and regulations as at the date of publication, but it is not exhaustive and does not constitute legal or tax advice. You should consult your tax adviser to ensure the information is relevant to your facts and circumstances. Please note, the tax treatment of Offshore Reporting Funds may change at any time.
The value of investments can fall as well as rise, and you may not get back the full amount you invest. Eligibility criteria, fees and charges apply.
This article is here to help you better understand what tax you may have to consider when investing. As a NatWest Invest customer we will provide you with a tax certificate each year so you know what you need to declare, and this article helps you to understand why.
Types of tax
Firstly, If you’ve invested using a Stocks and Shares ISA the good news is that any profits and/or income from your investments in the Stocks and Shares ISA are not taxable in the UK, making this article useful information to know but not something you need to worry about.
If, however, you’ve invested in what’s known as a general investment account then the following information on tax will likely apply to you.
The two main types of tax to think about when you have an investment are:
- Income Tax – the tax levied by the government on any income, most people will be used to seeing this type of tax on their pay slips.
- Capital Gains Tax – the tax levied by the government on something that has been sold for more than it was purchased for i.e. making a profit (a capital gain).
So those are the types of tax, but how do they work for the Personal Portfolio Funds?
Just like getting an income from employment you can get an income from an investment and you may need to pay tax on it.
How much tax you need to pay on this income depends on your income tax band i.e. basic rate, higher rate or additional rate and the type of your investment. The type of your investment matters because it determines if the income is classed as either interest or dividends which are taxed differently.
Calculating income tax
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 and Personal Portfolio Cautious 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 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 £2000 in dividends before you start need to pay tax on it. In this example the first £2000 of the dividends is not taxed but you may need to pay tax on the £500 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.
Income Tax and NatWest Invest
If you’ve invested with us through NatWest Invest we will send you a tax certificate each year telling you how much income is attributable to you. We will only send you a tax certificate if you have income from NatWest Invest to report.
If you’re invested in an ISA then there’s no income tax to be paid and you will not receive a certificate.
The income produced by the Personal Portfolio Funds is reinvested rather than paid out to your bank account this means your investment gains in value rather than paying an income.
View an example tax certificate showing where to find the important figures.
Capital Gains tax
It goes without saying when you invest you’re generally looking to make a profit on the money you’ve invested, these profits are subject to tax called capital gains tax.
You purchased an investment for £500 and later sold it for £1,000. This means you made a profit of £500 (£1,000 minus £500).
This gain might be subject to capital gains tax at the rate set by government. We say might because there are a number of considerations and allowances in place that reduce the amount of tax you pay.
Similar to income tax there is a capital gains tax allowance which currently allows for £12,300* of capital gains per person, per tax year before capital gains tax is charged. You’re also allowed to take into account any capital losses (the opposite of capital gains) and expenses when working out your profit and how much capital gains tax you would need to pay.
If you invested through NatWest Invest you may also be able to reduce the taxable gain by any amounts you have paid income tax on.
In summary, capital gains tax may need to be paid when you sell an investment for a profit, but there are various allowances in place to limit the amount of tax you pay.
*2022/2023 tax year allowance
Need more help?
This is only a short summary of the main types of tax you should be aware of, if you want to know more you can find more information on Government websites.
You can find out more about the Income tax rates and allowances from the Government.
You can find out more about capital gains tax and the relevant tax rates from the Government.
Everyone’s financial situation is different so if you’re unsure whether you need to pay tax or not you should seek independent tax advice.
Learn more about investments
Whether you’re an experienced investor or just finding out what investing is, we’ve got a range of articles to help you understand more about investing.
We regularly update our articles depending on what’s happening in the market so check back for future updates.