The UK tax system, managed by HMRC, separates your income into two broad categories with completely different rules and thresholds: Income Tax and Capital Gains Tax (CGT).
The two tax bases:
- Income Tax: Taxes money that 'comes in' on a regular basis. This includes your salary, interest from your bank accounts, dividends you receive, and rental income. You have an annual Personal Allowance of £12,570 on which you pay no tax. Above that, you pay by bands: Basic rate (20%), Higher rate (40%) and Additional rate (45%).
- Capital Gains Tax (CGT): Taxes the profit you make when you sell an asset (shares, funds, crypto, property) for more than you paid for it. You only pay tax at the moment of sale.
⚠️ Important
CGT has its own tax-free threshold: the Annual Exempt Amount. It is currently set at £3,000 per tax year. If your total capital gains for the year do not exceed £3,000, you pay no Capital Gains Tax. On any gain above that threshold, you would pay 18% (if you are a Basic rate taxpayer) or 24% (if you are a Higher or Additional rate taxpayer).