Like any other source of income, forex trading in the UK is subject to taxation. Learn how you should be taxed as a forex trader in this article.

UK Forex Trading Tax

The main goal of forex trading is to earn maximum profit from the market. Like any other income-generating activity, forex trading also has tax implications. So aside from trading strategies, forex traders also need to learn about forex tax to avoid legal consequences and calculate their expenses.

Trading in the United Kingdom is taxed considerably lower than in other European countries, but still higher than in most English-speaking developed countries such as Australia and New Zealand.

We'll examine everything you need to know about UK forex taxes in this article.

 

UK Trading Tax Based on the Government Taxation

Taxes in the UK are collected by the government, more specifically HM Revenue and Customs (HMRC). As the tax authority, they are responsible for collecting and managing most UK taxes including those charged from financial transactions.

 

Income Tax

Private individuals must pay taxes on their annual income. But as a trader, you can enjoy up to £1,000 allowance if forex trading is your secondary source of income. Anything you earn in profits more than that amount will be subject to income tax depending on the tax brackets below:

Bands Taxable Income Rate
Personal Allowance Up to £12,570 0%
Basic Rate £12,570 to £50,270 20%
Higher Rate £50,270 to £125,140 40%
Additional Rate over £125,140 45%

 

Capital Gains Tax

Capital Gains Tax (CGT) is the type of tax that you need to pay on profits you make from selling chargeable assets. This can be many things including shares, stocks, cryptocurrency, property, jewelry, paintings, and more. You only owe CGT if your total taxable gains are worth £6,000 or more. Anything less than that is tax-free.

If you pay a basic income rate, you'll be charged 10% on your gains from selling shares and other assets except residential property. If you pay a higher income rate, then the tax will be 20%.

Here's an example.

Let's say your taxable income is £25,000 and your taxable gains are £13,000 from selling CFD products.

The first thing you need to do is deduct the CGT tax-free allowance on your taxable gain. For the 2023/24 tax year, the allowance is £6,000, which leaves £7,000 taxable gain.

Add the amount to your taxable annual income (£25,000 + £7,000 = £33,000). Since £33,000 is less than £50,270 (the basic income rate), you pay Capital Gains Tax at 10%. So, you'll need to pay £700 in Capital Gains Tax.

 

Stamp Duty Tax

Stamp Duty Tax is paid only when buying shares. It costs approximately 0.5% of the transaction and applies based on the following conditions:

  • When you buy an existing share in a UK-based company
  • When you buy shares of a foreign company with a share registered in the UK.

 

UK Trading Tax Based on the Trader's Type

Not all forex traders are subject to tax. Thus, you need to configure where you fall as a trader. The following are two broad categories of traders:

  • Speculative Trader
    This category is for traders who earn less than £1,000 in a year from forex trading. If you are under this bracket, you are tax-free, meaning you're not subject to income tax or capital gains tax. HMRC considers this form of trading as speculative, equivalent to gambling, so your income will be calculated as gambling winnings.

  • Self-employed Trader
    You are considered a self-employed trader if forex trading is your main source of income. Therefore, you'll need to pay tax on all profits you earned over the tax-free Personal Allowance and you must declare your income to HMRC.

 

UK Trading Tax Based on the Instrument

The type of instrument that you choose to trade with also determines how your trading activity is taxed. For retail traders in the UK, two of the most common ways to trade forex are spread betting and CFD trading.

  • Spread Betting
    HMRC considers spread betting as a form of gambling instead of an investment because it simply requires traders to guess the direction of asset prices, whether it's going up or down over a certain period. Since the trader doesn't need to own the asset to make predictions, spread betting is completely tax-free. You're not required to pay any taxes for making a profit.

  • CFD Trading
    Contracts for Difference (CFDs) on the other hand, are part of derivative contracts. The applicable taxes are the same as trading Bitcoin and any other cryptocurrency. Meaning, you'll need to pay Capital Gain Tax on any profit on this instrument.

 

UK Trading Tax Based on the Personal Circumstances

This is the most complex out of the three factors and might require an in-depth analysis of the trader's personal trading activities that occurred across the year.

When assessing your personal circumstances, HMRC might consider the following aspects:

  • Salary bracket – whether you make above £50,000 annually
  • Whether you are self-employed, part of a company, or a limited company
  • The frequency and quantity of your trades
  • Whether you are liable to pay tax, which tax type, and how much
  • Duration of your trade
  • Whether you pay tax on the rest of your income
  • Instruments that you traded with

 

Case Studies

To illustrate how all aspects above are used together, we've prepared several case studies of hypothetical individuals who traded forex during the 2023/24 tax year.

  • Trader A is an office worker who enjoys spread betting in his spare time and he managed to gain £700 over the year. Due to purely speculative nature of his activity, the instrument he's picked, and the amount of profit he earned (less than £1,000), HMRC considers his gains as gambling winnings, so he won't have to pay any taxes for this.

  • Trader B works full time as an accountant, but he likes to do CFD trading as his secondary income. He successfully earned £16,000 this year. In this case, he's allowed to deduct £1,000 Personal Allowance from his profit, but he still needs to pay personal income tax on the remaining £15,000 at the basic rate of 20%.

  • Trader C is a full time investor who makes money solely from forex CFD trading. Due to his exceptional skills, he managed to earn £100,000 this year. This means, he may deduct £1,000 Personal Income Allowance and also pay Capital Gain Tax on any CFD trading that exceeds the tax allowance.

 

What Happens If You Fail to Pay Taxes in the UK?

If you miss a tax payment, HMRC will try to contact you either via letter, text, or even visit you at work or home. If you are unable to be reached, HMRC may take the following actions:

  • Employ a debt collector to collect the money
  • Deduct the tax amount directly from your wages
  • Claim things you own and sell them
  • Collect the money straight from your bank account
  • Take you to court for breaking the law
  • Make you bankrupt

 

How to Avoid Paying High Taxes

Without a proper strategy, trading tax can be quite burdensome. If you want to avoid paying high taxes, here are what you can do:

  • Keep detailed records of all your trades, expenses, and losses. Holding on to accurate documentation of your trading history can help maximize the deduction of your taxable income.
  • Consider trading with tax-free instruments like spread betting. This can be an effective way to participate in forex markets without having to pay a hefty amount of tax on your gains.
  • Do your research and understand the taxation laws to find out exactly how much you owe.
  • Find a professional tax advisor or accountant to help you calculate your taxes. It is to ensure that you are taking full advantage of the available tax-saving opportunities while still in compliance with the authority.

 

Other than trading tax, future advancements in the UK forex market are also important as they deal with regulatory changes, the way people trade, and how the market could evolve. Learn all about it further in Forex Forward: Anticipating the Future of Trading in the UK.