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.

News
Patrick Stewart in the classiest ice bucket to date
peopleSir Patrick took a more understated approach to the challenge
News
The current recommendation from Britain's Chief Medical Officer, is that people refrain from drinking on at least two days a week
scienceTheory is that hangovers are caused by methanol poisoning
Arts and Entertainment
tvWe have created an infogaphic that looks back over the previous incarnations of the Doctor
Sport
Olivier Giroud celebrates after his late goal saved Arsenal a point at Goodison Park
football Giroud rescues a point for Arsenal after they trailed by two goals
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
News
i100
News
newsComedian Lee Hurst started trend with first tweet using the hashtag
News
i100
News
Australian rapper Iggy Azalea was left red faced but, thankfully, unhurt after taking a few too many steps backwards, sending her tumbling off the stage.
people
Life and Style
A nearly completed RoboThespian robot inside the Engineered Arts workshop is tested in Penryn, England. The Cornish company, operating from an industrial unit near Falmouth, is the world's only maker of commercially available life sized humanoid robots
techSuper-intelligent robots could decide destroying the human race is the kindest thing to do
Life and Style
techConcept would see planes coated in layer of micro-sensors and able to sense wear and tear
News
scienceExcitement from alien hunters at 'evidence' of extraterrestrial life
News
newsRyan Crighton goes in search of the capo dei capi
Life and Style
Customers can get their caffeine fix on the move
food + drink
News
i100
Extras
indybest

Finacial products from our partners
Property search

A student's guide to financial survival: You don't have to drown in debt at university

Fresh from A-level delight, the moment does not have to be soured by students resigning themselves to thousands of pounds worth of debt in three years' time. Rob Griffin sees how to pass the university challenge

'Dismal' eurozone data sparks concerns

European Central Bank chief Mario Draghi is under pressure to launch promised stimulus before the EU slides further
Love but not marriage: property is one area where cohabiting couples are in danger of losing out

How couples can protect their financial interests when cohabiting

People who simply live together cannot assume they have the same rights to each other's assets as spouses or civil partners. Michelle McGagh sees how they can protect their financial interests

India could be jewel in the crown for investors

With a new government and an ambitious prime minister, the country offers the prospect of strong returns. But there may be hiccups ahead, warns Simon Read

Child Maintenance Service to replace Child Support Agency - but is it better?

Reforms to the vexed question of child support payments by absent parents mean extra charges for both sides. Neasa Macerlean reports

Barclays's new life insurance heralds a revolution on the high street

The new product marks a shift towards 'clear, straightforward and standardised' banking products, says Simon Read

How to protect your assets if the stock markets begin to head south again

Are you worried about your portfolio? Nick Paler asks fund managers and investment insiders for advice
Fuel poverty campaigners united in criticising the delays in helping those in fuel poverty

Plans to tackle fuel poverty are slammed by campaigners

Charities and action groups believe that the Government's proposals are woefully inadequate
Sell it with flowers: competition is 'intense' for homes with outside spaces

Gardens add a tenth to the value of your home

A London estate agent yesterday put a price on having a garden. David Pollock of Greene & Co reckons it can increase a property's value by a tenth.

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

    Software Developer (Java /C# Programmer)- London

    £30000 - £45000 per annum: Harrington Starr: A global investment management fi...

    Senior Network Engineer-(CCIE, CCNP, Cisco, London)

    £65000 - £75000 per annum: Harrington Starr: Senior Network Engineer-(CCIE, CC...

    Senior Network Analyst - (CCIE, Cisco, CISSP)

    £70000 - £80000 per annum: Harrington Starr: Senior Network Analyst - (CCIE, C...

    Senior Network Engineer-(Design, Implementation, CCIE)

    £60000 - £80000 per annum: Harrington Starr: Senior Network Engineer-(Design, ...

    Day In a Page

    All this talk of an ‘apocalyptic’ threat is simply childish

    Robert Fisk: All this talk of an ‘apocalyptic’ threat is simply childish

    Chuck Hagel and Martin Dempsey were pure Hollywood. They only needed Tom Cruise
    Mafia Dons: is the Camorra in control of the Granite City?

    Mafia Dons: is the Camorra in control of the Granite City?

    So claims an EU report which points to the Italian Mob’s alleged grip on everything from public works to property
    Emmys look set to overhaul the Oscars as Hollywood’s prize draw

    Emmys look set to overhaul the Oscars as Hollywood’s prize draw

    Once the poor relation, the awards show now has the top stars and boasts the best drama
    What happens to African migrants once they land in Italy during the summer?

    What happens to migrants once they land in Italy?

    Memphis Barker follows their trail through southern Europe
    French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

    French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

    The ugly causeway is being dismantled, an elegant connection erected in its place. So everyone’s happy, right?
    Frank Mugisha: Uganda's most outspoken gay rights activist on changing people's attitudes, coming out, and the threat of being attacked

    Frank Mugisha: 'Coming out was a gradual process '

    Uganda's most outspoken gay rights activist on changing people's attitudes, coming out, and the threat of being attacked
    Radio 1 to hire 'YouTube-famous' vloggers to broadcast online

    Radio 1’s new top ten

    The ‘vloggers’ signed up to find twentysomething audience
    David Abraham: Big ideas for the small screen

    David Abraham: Big ideas for the small screen

    A blistering attack on US influence on British television has lifted the savvy head of Channel 4 out of the shadows
    Florence Knight's perfect picnic: Make the most of summer's last Bank Holiday weekend

    Florence Knight's perfect picnic

    Polpetto's head chef shares her favourite recipes from Iced Earl Grey tea to baked peaches, mascarpone & brown sugar meringues...
    Horst P Horst: The fashion photography genius who inspired Madonna comes to the V&A

    Horst P Horst comes to the V&A

    The London's museum has delved into its archives to stage a far-reaching retrospective celebrating the photographer's six decades of creativity
    Mark Hix recipes: Try our chef's summery soups for a real seasonal refresher

    Mark Hix's summery soups

    Soup isn’t just about comforting broths and steaming hot bowls...
    Tim Sherwood column: 'It started as a three-horse race but turned into the Grand National'

    Tim Sherwood column

    I would have taken the Crystal Palace job if I’d been offered it soon after my interview... but the whole process dragged on so I had to pull out
    Eden Hazard: Young, gifted... not yet perfect

    Eden Hazard: Young, gifted... not yet perfect

    Eden Hazard admits he is still below the level of Ronaldo and Messi but, after a breakthrough season, is ready to thrill Chelsea’s fans
    Tim Howard: I’m an old dog. I don’t get too excited

    Tim Howard: I’m an old dog. I don’t get too excited

    The Everton and US goalkeeper was such a star at the World Cup that the President phoned to congratulate him... not that he knows what the fuss is all about
    Match of the Day at 50: Show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition

    Tom Peck on Match of the Day at 50

    The show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition