When people talk about the financial markets, they often fail to recognise the differences that distinguish specific niches and products. Anyone who has ever tried online trading can testify to this, as few markets are accessible across three alternative trading sessions or during a 24-hour period.
Each individual market niche and financial product also sees different tax levies applied and understanding this is crucial when attempting to build your trading portfolio.
In this article, we’ll consider this in further detail while asking which trading vehicles offer the biggest tax breaks to investors.
Income and Capital Gains Tax
Let’s start with the basics; as you’ll have standard income tax levies applied to any profits (or interest) that you generate through your investments.
This will depend on your cumulative earnings, of course, although those of you who are basic rate taxpayers will pay 20% on your profits.
Conversely, higher and additional rate taxpayers will pay 40% and 45% income tax respectively, and while this will eat into your profits you’ll have to boast considerable earnings to qualify for such exalted rates.
Then we come to capital gains tax, which is applied to a host of traditional asset classes including shares, commodities and property. You’ll qualify for this in instances where the profit generated by selling your assets exceeds £11,300, while the amount that you ultimately pay will depend on your individual tax rate.
More specifically, basic rate taxpayers will fork out 10% in capital gains tax, while those charged higher or additional rate will pay 205 on their earnings.
What About Dividend Tax and Stamp Duty?
If you’re a risk-averse investor, you may well invest in blue-chip stocks that yield regular dividends. In this instance, you’ll need to pay dividend levy on your shares, although it’s important to note that all investors will have a tax-free allowance of up to £5,000 through this investment vehicle.
When buying shares and the underlying financial instrument that underpins them, you may also be required to pay stamp duty. This is because you’re assuming ownership of the stock, and this levy may be applied in instances where you have utilised a stock transfer or completed an online transaction.
Stamp duty is charged at 0.5% of every £1,000 worth of stocks and shares, but it is possible to avoid this completely if you’re willing to compromise on the way in which you trade. By leveraging techniques such as spread betting you can speculate on stocks without assuming ownership of the asset, negating the need to pay stamp duty and enabling you to profit even as the value of your stock declines.
Due to the nature of spread betting, you’ll also avoid capital gains tax, so it’s worth considering when looking to build or diversify your portfolio.