I want to invest in a stock ETF, but I'm wondering if any profit I make from these investments is subject not only to the 20% Capital Gains Tax but also counts towards income and thus subject to Income Tax (45% for me) additionally.

So suppose I have 200,000GBP in stocks. How much is the government going to take from me in these 2 situations:

Situation 1: One year the stocks' value increases in value to 252,000.

That's 52,000 profit, and minus the 12,000 allowance leaves 40,000 to be taxed by CGT. Is the government going to take only 8,000 (CGT 20% of that 40,000)? Or it's going to take that 8,000 plus 23,400 (income tax 45% of the 52,000 total profit) for a total tax of 31,400?

Situation 2: One year the stocks' value increases in value to only 212,000, i.e. exactly the allowance.

Do I pay no tax on that, or I pay 5,400 (income tax 45% of the 12,000 profit)?

If one must pay Income Tax on top of CGT I don't understand why anyone would invest in equities at all, because 31,400 being taken from a 52,000 profit equates to a measly 3.6% net income from stocks when assuming a long-term annualised 9% value increase of the stocks. But the risk is relatively large in comparison.

  • 1
    Also note that you don't pay tax on gains until you sell the investments. So just rising in value over a year is not necessarily taxable.
    – D Stanley
    Nov 14 '19 at 17:48

You’ll be relieved to know you don’t pay income tax on gains.

You pay just Capital Gains Tax (CGT) on gains, and income tax on dividend income (which is subject to its own thresholds).

However, do note that the rate of CGT that you pay ([1]) is dependent on your income tax bracket in the tax year in question (the relevant date being the date you crystallised the gain, in this case the date on the deal note). Here is a link to help calculate the relevant rate:

Two other notes in case helpful…

First, if you hold these shares in an ISA, or in a SIPP, both these wrappers give you shelter from both these taxes. Within an ISA or SIPP you can bank as large or small a capital gain as you like, and you won’t be liable for Capital Gains Tax. With a SIPP, of course, once you’re old enough to take the benefits, you can take up to 25% tax free, and you will pay income tax on any subsequent income from e.g. drawdown or annuity.

(As with all things pensions and stocks these are generalisations and simplifications, remember tax rules can change and the benefits/terms will depend on your circumstances at the time).

Second – in case this is not a hypothetical question, but one based on a real situation – it might be worth pointing out that if you have the risk appetite (and the financial position) to reinvest gains into the higher-risk EIS and SEIS investment schemes, these can both be attractive to investors with a Capital Gains tax bill. Because they invest in early-stage and seed-stage companies, which are more likely to fail than larger companies and are not tradeable (i.e. you need to wait for an exit before you get back capital and any gains), the Government sweetens the deal by allowing you to indefinitely defer CGT (EIS) or claim 50% CGT relief (SEIS).


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