What is Investment Income?

For the majority of individuals, the only taxable income that needs consideration is their salary. This is taxed at source, meaning that your tax bill is deducted directly from your wage packet, unless you are self-employed. However, an increasing number of people are looking towards various forms of investment in a bid to increase their income.

There is a huge variety of investment types available, some of which are more tax efficient than others. But regardless of whether or not your investment will be taxed (and it is highly likely that it will be), it is important to understand the distinction between earned income and investment income.

Investment Vehicles

Essentially, investment income is any income that is derived from what is known as an ‘investment vehicle’. This vehicle could be a savings account, shares, property, or any other form of investment. The income you earn from this vehicle could take the form of Dividends, interest or capital gain, although there are a number of other ways in which you could accrue investment income.

If you have ever read the annual report of a public company, you are likely to have seen a section entitled ‘investment income’. This means precisely the same for companies as it does for individuals, and is the area in which the organisation declares the portion of their profits that are due to the investment of surplus money. As has been mentioned, the vast majority of most individuals’ income is that which is earned through employment. However, as savings are built up the potential for investment becomes higher and an investment portfolio can be developed.

Legislation

Investing has become considerably easier in recent years. Many people now have an ISA (Individual Savings Account), which is a tax-free savings account. Income accrued through interest on your ISA is not subject to Income Tax and you do not, therefore, need to worry about paying anything in these cases. However, more and more banks and other financial institutions are beginning to market user-friendly investment vehicles, such as mutual funds, towards regular consumers who have some extra cash that they want to put to use.

Until the financial year ending 1985, investment income was subject to an extra tax above and beyond the regular rate of income tax. This, in itself, put a considerable number of individuals off investing as it was more difficult to ensure that one was adhering to the Tax Code. The Income Tax (Trading and Other Income) Act 2005, however (and previously the Income and Corporation Taxes Act 1988) now defines earned income and investment income in much the same way. Different types of investment income, however, are taxed at different rates – for example, dividends are taxed differently to savings.

Declaring and paying your investment income tax is generally simple. In many cases, the tax will be deducted at source, or absorbed into the price of the investment, as with many types of share transfer. If you are required to fill out a Self Assessment at the end of the tax year, you will also need to declare any investment income on this form. Again, tax is paid differently depending on the type of investment, and you may wish to consult other articles in this section for more information on the correct ways to pay.