How much tax do you pay on an ETF UK?
Dividends generated from ETFs or any traditional investment are usually subject to income tax, because dividends are income for investor. The income tax rate depends on an individual's income, but the rate can range from 20% to 50%.
For ETFs held more than a year, you'll owe long-term capital gains taxes at a rate up to 23.8%, once you include the 3.8% Net Investment Income Tax (NIIT) on high earners. If you hold the ETF for less than a year, you'll be taxed at the ordinary income rate.
ETFs allow investors to circumvent a tax rule found among mutual fund transactions related to capital gains. ETFs are structured in a way that avoids taxable events for ETF shareholders.
If you are a basic rate taxpayer you will pay 10% CGT on your profits over £12,300. If your profits take your total earnings into the next tax rate, you will pay 28% CGT on your gains from residential property and 20% on your gains from other chargeable assets on the amount you are over the basic tax bracket.
Taxes on ETFs and mutual funds are the same as any other investment. You may pay tax when selling your shares for a profit. This tax is called capital gains. In each tax year, you can earn up to £12,300 (2021/22) in profit before having to pay capital gains tax.
The taxation of ETF's is determined by the the asset class. Bonds are subject to Income Tax, with equities and commodities being subject to dividend tax. All three are subject to Capital Gains Tax.
ETFs can bypass taxable events using the in-kind redemption process, while also purging their portfolios of low-cost-basis securities to help portfolio managers avoid realizing large gains if they must sell holdings. But not all ETFs create and redeem shares in kind.
| Fund | Expense ratio |
|---|---|
| Vanguard Tax-Exempt Bond ETF (ticker: VTEB) | 0.05% |
| Vanguard Short-Term Tax-Exempt Bond ETF (VTES) | 0.07% |
| Vanguard High-Yield Tax-Exempt Fund Investor Shares (VWAHX) | 0.17% |
| Schwab Tax-Free Bond Fund (SWNTX) | 0.38% |
However, there are disadvantages of ETFs. They come with fees, can stray from the value of their underlying asset, and (like any investment) come with risks.
Special treatment for certain ETF losses
Currency ETFs do not generate capital gains or losses, but rather ordinary income or losses. This means that losses on the sale of shares in these ETFs produce ordinary losses that can be used to offset ordinary income, such as wages and bank interest.
Are ETFs income tax efficient?
ETFs trade on the major stock exchanges at any time during the day. Prices fluctuate throughout the day like stocks. ETFs generally have lower operating expenses, no investment minimums, are tax efficient, have no sales loads, and have brokerage commissions.
Investors who exchange or redeem out of a Vanguard fund will be eligible to purchase or exchange back into the same fund 30 calendar days later.
| Personal Allowance | Capital Gains Tax | Dividend Tax |
|---|---|---|
| £12,570, above which gains and dividends are taxed | 20% on gains for higher ratepayers | 33.75% for higher ratepayers |
| -- | 10% for basic ratepayers | 8.75% for basic ratepayers |
| -- | £6,000 allowance | £2,000 allowance |
Yes, UK residents are charged withholding tax (WHT) of 15% on dividends or income received from US stocks.
| Income Tax band | Personal Savings Allowance |
|---|---|
| Basic rate | £1,000 |
| Higher rate | £500 |
| Additional rate | £0 |
- iShares Core S&P 500 ETF IVV.
- iShares Core S&P Total U.S. Stock Market ETF ITOT.
- Schwab U.S. Broad Market ETF SCHB.
- Vanguard S&P 500 ETF VOO.
- Vanguard Total Stock Market ETF VTI.
Just as with individual securities, when you sell shares of a mutual fund or ETF (exchange-traded fund) for a profit, you'll owe taxes on that "realized gain." But you may also owe taxes if the fund realizes a gain by selling a security for more than the original purchase price—even if you haven't sold any shares.
UK-domiciled ETFs are those that are registered and managed within the UK. These funds are regulated by the Financial Conduct Authority and are subject to UK tax laws. For UK investors, the treatment of UK-domiciled ETFs is, generally speaking, more straightforward compared with ETFs domiciled overseas.
As a US citizen or Green Card Holder, receiving dividends in the UK is a unique situation. There is a capital gains tax allowance, that for 2020-21 is £12,300 – an increase from £12,000 in 2019-20. This allowance is the amount before any tax is payable. Any capital gains exceeding this amount will be subject to US tax.
| 2022/23 | Dividend Tax rate | From |
|---|---|---|
| Basic Rate | 8.75% | £2,000 |
| Higher Rate | 33.75% | £37,701 |
| Additional Rate | 39.35% | £150,000 + |
How much tax do you pay on dividends in UK?
| Tax band | Tax rate on dividends over the allowance |
|---|---|
| Basic rate | 8.75% |
| Higher rate | 33.75% |
| Additional rate | 39.35% |
If you have $1,000 invested in the S&P 500, you would receive $20 in dividends which would be taxable. However, if you're in the 10% or 15% tax bracket your tax rate on qualified dividends would be 0%. Remember that the exact tax you pay is tied to your tax rate and income.
Investors in an iShares ETF can earn interest income through their investment if the iShares ETF earns interest income through its underlying holdings and distributes this interest income to its investors. Interest income is normally taxable at the individual's marginal tax rates.
ETFs provide investors with a Standard Distribution Statement (SDS) that breaks down what they, or their registered tax agent, need to declare in their tax return.
Practice buy-and-hold investing
As long as you don't sell, you won't be liable for capital gains taxes, which can be substantial. In fact, you can hold your investments indefinitely and permanently defer any tax on gains.
