Keep it all on file

A BEGINNER'S GUIDE TO; INVESTING IN SHARES; Share investors may face 10 different tax rates. It's time to do that paperwork, says Magnus Grimond

POSSIBLY one of the most tedious aspects of investing in shares is dealing with the paperwork involved in paying tax. Unfortunately, the onset of the self-assessment tax system, whose first major deadline looms at the end of this month, means people delaying getting to grips with their tax affairs are about to be heavily out of pocket. Taxpayers who have not submitted a tax return and paid the resulting tax by the end of this month face an immediate pounds 100 fine and interest penalties.

Any delay might be understandable, given the complexity that seems to be generated whenever the Inland Revenue meets the stock exchange. Maurice Parry-Wingfield, of accountants Deloitte & Touche, says new dividend tax rates and other changes introduced by Labour mean that personal taxpayers will be facing at least 10 separate rates of tax by 1999.

Currently, the receipt of dividends from shares need not complicate matters unless it pushes you into the 40 per cent tax band or you already pay no tax. The principle is that dividends are received with basic-rate tax already paid. The "tax voucher" sent with your dividend cheque or payment receipt always shows this "tax credit" and the net dividend you are left with after it has been deducted.

The tax credit relieves you of paying any further tax if you fall within the 20 or 23 per cent tax bands. Higher-rate taxpayers have another 20 per cent to pay on the gross sum - that is, the tax credit plus the net dividend - while non-taxpayers and personal equity plan (PEP) investors can reclaim the tax credit. (The only wrinkle to this is if the company pays a so-called foreign income dividend, in which case the tax already paid is not recoverable by anyone.)

Relatively straightforward thus far, but the picture will become about as clear as mud once Labour's changes to the rules take effect in April 1999. First off, the tax credit will be cut from 20 to 10 per cent, although, somewhat confusingly, it will become irrecoverable for those who do not pay tax: bad news for non-taxpayers and others whose tax allowances are not absorbed by other income. If you are one of these, you will in effect be paying tax where you did not before, unless you keep your shares in one of the Individual Savings Accounts (ISAs) coming in from April 1999.

If you are a basic or lower-rate taxpayer you will continue to have nothing further to pay, leaving your after-tax income exactly where it was before.

The effect on higher-rate tax payers is also neutral, even if a new layer of confusion is added by the introduction of a 32 per cent rate band. This is the rate to be applied to the grossed up value of dividends (that is, the net payment plus the new 10 per cent tax credit) to ensure that higher-rate payers meet their bigger tax commitments.

But prepare to reach for the ice pack when you try to unravel the mysteries of Capital Gains Tax (CGT). The principle is simple: you are taxed on crystallised profits in excess of (currently) pounds 6,500 a year. Losses can be set off against capital gains made elsewhere. Incidental costs such as brokers' fees can be charged and the effects of inflation can also be factored in to reduce the taxable gain. But the fun really begins if you sell only part of a holding of shares.Either get the Inland Revenue to work out the sums or, better still, seek professional advice.

At present, only around 100,000 people a year are fortunate enough to make sufficient gains to become liable for capital gains tax. And that already small number could fall further as a result of the review of CGT, apparently with the aim of encouraging more long-term investment. The latest rumour is that any changes to be announced in the spring Budget are likely to be minimal.

But, most importantly, investors should remember two golden rules about tax. Firstly, do not let tax considerations rule investment decisions: tax savings will rarely make up for a bad investment. Secondly, do keep good records. Even an old manila envelope to keep your dividend counterfoils together and a file for contract notes and other vital correspondence will save countless hours of frustration when the dreaded tax return arrives - in April.

PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Sport
Shinji Kagawa and Reece James celebrate after the latter scores in Manchester United's 7-0 victory over LA Galaxy
football
Voices
voicesGood for Lana Del Rey for helping kill that myth, writes Grace Dent
Sport
Farah returns to the track with something to prove
Commonwealth games
Life and Style
fashion Designs are part of feminist art project by a British student
Arts and Entertainment
The Tour de France peloton rides over a bridge on the Grinton Moor, Yorkshire, earlier this month
film
News
Very tasty: Vladimir Putin dining alone, perhaps sensibly
news
Arts and Entertainment
Top guns: Cole advised the makers of Second World War film Fury, starring Brad Pitt
filmLt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a uniform
Life and Style
Listen here: Apple EarPods offer an alternative
techAre custom, 3D printed earbuds the solution?
News
Snoop Dogg pictured at The Hollywood Reporter Nominees' Night in February, 2013
people... says Snoop Dogg
News
The University of California study monitored the reaction of 36 dogs
sciencePets' range of emotions revealed
Arts and Entertainment
A scene from Shakespeare in Love at the Noel Coward Theatre
theatreReview: Shakespeare in Love has moments of sheer stage poetry mixed with effervescent fun
Finacial products from our partners
Property search

Current accounts are too costly and confusing, says CMA as it announces investigation into Britain's biggest banks

Competition regulator to investigate market where it's hard for customers to make comparisons and the big banks' charges can be set too high
All the signs have been pointing up for buy-to-let, but there are clouds on the horizon

Buy-to-let: is it a boom or a bubble fit to burst?

People borrowing to be landlords could face the same restrictions as homebuyers, with MPs voicing fears that property speculation may be overheating the market

Moment of truth for payday lenders: Watchdog plans to curb cost of short-term loans

The chief of the City watchdog, Martin Wheatley, spoke exclusively to The Independent's Simon Read about its attempts to control the worst excesses of unscrupulous high-cost credit companies

Consumers given power to choose a green deal

How would you like to be able to choose how your electricity is made and even where it come from? It may sound futuristic and fanciful but the independent supplier Co-operative Energy has made it a reality this week.

'Scrap the trap': calls for change grow as banks are told to play fair with loyal savers

City regulator says existing customers suffer worst rates

Motor insurers divided on proposals for whiplash ban

MPs want medical evidence for claims. Will this bring higher premiums?

British Gas repays £1m for mis-sold deals

British Gas was yesterday forced to pay back £1m to its customers after mis-selling them energy deals.

Bare necessities of life cost a pensioner £10,000

Pensioners now have to spend £10,387 a year on basic necessities such as food and fuel. new figures published today reveal.

Six months since its introduction, Obamacare has set market's pulse racing

As America's health reforms take effect, some firms look well placed to benefit, says Simon Read

Holidaymakers warned over hidden charges when opting to pay in sterling abroad

Fresh warnings emerged this week that overseas retailers and hotels aren't playing fair.

Employees will be able to request flexible hours in drive to make workplaces family friendly

From next week employees will be able to request changes to working hours. Rob Griffin weighs up the options

E2Energy's wind-turbine scheme offers green investors 7.5 per cent a year

If you're fed up with paltry returns on your savings and are interested in green energy, a new loan-based crowdfund launched this week could be a better home for your cash.

Why miss the chance of tax-free returns as Isas raise their game?

The tax-free limit of £15,000 is a big jump and rates for savers are starting to edge up, writes Simon Read
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    IT Transition Manager - Stirling - Banking - £400

    £400 - £420 per day: Orgtel: IT Transition Manager - Banking - Scotland - £400...

    Test Lead - Financial Reporting - Banking - London

    £350 - £400 per day: Orgtel: Test Lead, London, Banking, Financial Reporting, ...

    Business Analyst, Retail Bank, £375-400p/d

    £375 - £400 per day + competitive: Orgtel: My client, a leading bank, is curre...

    PMO Analyst - London - Banking - £350 - £400

    £350 - £400 per day: Orgtel: PMO Analyst - Banking - London - £350 -£400 per d...

    Day In a Page

    Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

    Screwing your way to the top?

    Good for Lana Del Rey for helping kill that myth, says Grace Dent
    Will the young Britons fighting in Syria be allowed to return home and resume their lives?

    Will Britons fighting in Syria be able to resume their lives?

    Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
    Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

    Beyoncé poses as Rosie the Riveter

    The wartime poster girl became the ultimate American symbol of female empowerment
    The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

    The quest to find the perfect pair of earphones

    Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
    US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

    Meet the US Army's shooting star

    Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform
    Climate change threatens to make the antarctic fur seal extinct

    Take a good look while you can

    How climate change could wipe out this seal
    Should emergency hospital weddings be made easier for the terminally ill?

    Farewell, my lovely

    Should emergency hospital weddings be made easier?
    Man Booker Prize 2014 longlist: Crowdfunded novel nominated for first time

    Crowdfunded novel nominated for Booker Prize

    Paul Kingsnorth's 'The Wake' is in contention for the prestigious award
    Vladimir Putin employs a full-time food taster to ensure his meals aren't poisoned

    Vladimir Putin employs a full-time food taster

    John Walsh salutes those brave souls who have, throughout history, put their knives on the line
    Tour de France effect brings Hollywood blockbusters to Yorkshire

    Tour de France effect brings Hollywood blockbusters to Yorkshire

    A $25m thriller starring Sam Worthington to be made in God's Own Country
    Will The Minerva Project - the first 'elite' American university to be launched in a century - change the face of higher learning?

    Will The Minerva Project change the face of higher learning?

    The university has no lecture halls, no debating societies, no sports teams and no fraternities. Instead, the 33 students who have made the cut at Minerva, will travel the world and change the face of higher learning
    The 10 best pedicure products

    Feet treat: 10 best pedicure products

    Bags packed and all prepped for holidays, but feet in a state? Get them flip-flop-ready with our pick of the items for a DIY treatment
    Commonwealth Games 2014: Great Scots! Planes and pipers welcome in Glasgow's Games

    Commonwealth Games 2014

    Great Scots! Planes and pipers welcome in Glasgow's Games
    Jack Pitt-Brooke: Manchester City and Patrick Vieira make the right stand on racism

    Jack Pitt-Brooke

    Manchester City and Patrick Vieira make the right stand on racism
    How Terry Newton tragedy made iron men seek help to tackle their psychological demons

    How Newton tragedy made iron men seek help to tackle their psychological demons

    Over a hundred rugby league players have contacted clinic to deal with mental challenges of game