Do I have to declare capital gains and dividends if they are tax-free?

I had some shares in investment trusts outside of an ISA and sold them all in March so I could take my profit before the capital gains tax allowance was reduced.

Last year the capital gains tax allowance was £6,000, so my profit of £5,980 is below that.

I also received £800 in dividends from my investments, which is less than the £1,000 dividend exemption from last year.

Do I have to declare these in my income tax return or only the amounts above the thresholds?

It seems that I do not have to declare the capital gains, but I do have to declare the dividends. Why would that be?

Angharad Carrick of This Is Money responds: Filing a tax return can be very confusing and frustrating.

Normally, anyone who receives income that is not taxed at source (for most people this is their PAYE salary) must complete a tax return.

People who need to complete tax returns include high earners and self-employed individuals, such as sole traders and company directors, as well as people who receive income from other sources, such as dividends.

In your case, you receive income from your dividends and you have also made a capital gain after selling your shares in investment funds.

This means that you may have to pay tax on that income and therefore file a self-assessment tax return. However, as you say, certain thresholds need to be met before dividend income or capital gains from profits are taxed. We explain both of these below.

When do you have to declare dividend income?

You do not have to pay tax on dividend payments you receive below the threshold applicable for the tax year.

In your case, you earned the dividend income last tax year when the threshold was £1,000. This means that the £800 you received should be tax-free.

Those who received dividend payments above this threshold had to pay taxes based on their income tax rate.

The dividend withholding tax currently stands at 8.75 percent for basic rate taxpayers, 33.75 percent for higher rate taxpayers and 39.35 percent for top rate taxpayers.

To make matters further complicated, the dividend tax exemption threshold has been reduced in recent years – from £2,000 to £1,000 in April 2023 and then to just £500 from April 2024 for this tax year.

If you hold your investments in a stocks and bonds ISA, you don’t have to worry about paying tax on dividend payments on shares, investment trusts, funds and ETFs, as they come in a tax-free wrapper.

The big question, however, is whether you have to declare your dividends, even if they are below the annual dividend tax threshold.

I’m not sure if you’ve filed your taxes yet, but if you file your own tax return, you must report dividends even if they are below the dividend exemption.

This forms part of the income section and you must declare that you received £800 in dividends last tax year.

However, if you are paid via PAYE and the tax authorities have not told you that you need to file a tax return, you may not have to do so as your dividends do not exceed the threshold.

For example, if your income last year was less than £100,000 and you have no tax-free income other than dividends and these fall within the dividend exemption, you do not need to complete an income tax return.

A similar situation applies to the personal savings deduction and interest tax.

Please note that the rules may differ for you, depending on your personal circumstances. If you are in doubt, please contact the Tax and Customs Administration.

Chris Springett, Partner in Private Client Tax at Evelyn Partners, says: The income tax and capital gains tax components are separated in one tax return.

When you file a tax return, you must report all income that is “taxable.”

This is income that can be taxed even if the amount of the income is less than an exemption, such as here for dividends. The only income you can leave out is income that is completely exempt from tax, regardless of the amount, such as income from an Isa.

This is partly because your total taxable income, which includes dividends, affects your eligibility for certain exemptions. These include the personal exemption and the personal savings exemption, but not the dividend exemption.

You must include the dividends in your tax return, but because the dividend exemption applies, you do not pay tax on them.

When should you declare income from capital gains?

For capital gains tax, the picture is slightly more complicated.

You only have to declare your capital gains if they exceed the annual threshold.

In your case, this threshold is £6,000, because the profit was made in the last tax year before it was reduced to £3,000 in April 2024.

You must also declare any capital gains on your tax return if your sale proceeds are more than £50,000, even if your gains are less than the annual exempt amount.

You do not need to file a tax return if your main capital gain is your home, because the home ownership deduction applies to the full amount.

If you have sold land or property that is not your main residence, you may need to report this to HMRC on a separate 60-day tax return form and pay within that period from the date of completion.

You must report the removal even if you wish to submit a self-assessment form later in the year.

However, an exception applies if the tax return is filed before the 60-day filing deadline, or if the self-assessment deadline falls before the 60-day deadline.

Angharad Carrick says: If you have not yet filed a tax return and are required to do so, you must do so online.

You must notify HMRC by 5th October that you need to complete a tax return and have not submitted one previously. You must apply online.

The deadline for filing a paper return is October 31, 2024. If you file the return online, this is January 31.