Taxes on capital gains, dividends, and interest?

[Jerrek]

How are capital gains, interest, and dividends taxed in the United Kingdom?


In Canada:

Capital gains - In a given year, subtract all capital losses you realized from all capital gains to get your net capital gain. 50% of that amount is taxed at your marginal income tax rate. If you realized a net capital gain of $2,000 and your marginal income tax rate is 16%, you pay 0.16x1000 = $160 in tax.


Interest - This is the worst way to earn money. Interest is added to your income and taxed like regular income at the marginal income tax rate. So, $2,000 in interest at 16% tax rate means you pay $320 in tax.


Dividends - This is a weird one. Dividends are "grossed up" by 25% to get the taxable amount. If you received $100 in dividends, you are taxed on $125. You then pay your marginal income tax rate on that amount. After that, you get a "tax credit," 16.6% from the federal government and x% from the province. For example, you earn $1,000 in dividends. Taxable dividends are $1,250 (25% upped). Federal tax credit is $167 (16.6% of original amount). Depending on your province and income level, you effectively pay between 24% and 37% tax on dividends.

Dividends from foreign companies are NOT grossed up and you do NOT get a tax credit. That means they are just taxed at your marginal tax rate.

Originally Posted by Jerrek

How are capital gains, interest, and dividends taxed in the United Kingdom? In Canada:

Capital gains

In the UK you have a £7,900 capital gains allowance (03-04). The rate of tax depends on which tax band your gains fall into after all other income has been taken into account, however there are systems of exemptions and "taper relief" whereby the longer you have held an asset the less CGT you pay.

Interest

Most interest is "taxed at source" ie the applicable rate of tax is deducted before the money gets to you. However there are systems like the ISA (Individual Savings Account) which allow you to get the interest without tax for investments of £3000 in cash, £3000 in shares and £1000 in life insurance.

If you are a non-taxpayer (ie your income for the year is lower than your personal tax allowance), you can fill in a form IR35 which means the interest is paid gross, rather than nett.

Dividends

Dividends are generally counted simply as "income" and taxed according to your usual rate.

If your taxable income after your personal allowance (eg £4615 for a single person) is less than £2020 (for 04-05) you pay 10% tax on everything. If it's between 2021 and £31,400 you pay 20% and if it's over £31,401 you pay 40%

Note, all of this is very rough, there's all sorts of fiddly bits (naturally!)

[Jerrek]

Our tax rates...

Federal
Allowance: £4,000 or so

Up to £15,000 - 16%
Then, up to £30,000 - 22%
Then, up to £50,000 - 26%
Then, 29%

Provincial
Allowance: £4,500 or so

Up to £15,000 - 6%
Up to £30,000 - 9%
Then, 11%



Now I'm wondering. What about interest on bonds? Do they deduct the tax before you get the money? Thats different from us. And of course, there are lots of other little thingies in our tax laws too. Deductions... There are millions of them. You get an allowance for each child, for medical costs, for moving, for your house, etc. All donations to charities are deducted 100%.

Originally Posted by Jerrek

Now I'm wondering. What about interest on bonds? Do they deduct the tax before you get the money?

I don't think so, although I'm not certain on this. I think you declare that as "separate income".

And of course, there are lots of other little thingies in our tax laws too. Deductions... There are millions of them. You get an allowance for each child, for medical costs, for moving, for your house, etc. All donations to charities are deducted 100%.

Well there are all sorts of little things in our system too, some of benefit, some not so much. For some details see the Inland Revenue's Self-Assessment site at http://www.inlandrevenue.gov.uk/sa/