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The UK is home to one of the world’s largest and most active forex trading markets, with a wide range of traders using various trading instruments to make their profits. As with any other type of trading or investing, forex traders in the UK must pay taxes on their earnings.
Four main types of tax apply to forex trading in the UK: Income Tax, Corporation Tax, Capital Gains Tax, and Stamp Duty Reserve Tax. Income Tax is paid on your total earnings from all sources, while Corporation Tax applies only to payments from your limited company. Capital Gains Tax is paid on profits from selling assets, such as shares or property, and Stamp Duty Reserve Tax is paid when you buy shares in a company.
Each tax type has its rules and regulations, which can be complex and vary depending on factors like how much you earn and what trading instruments you use. Forex traders need to understand these rules and stay up-to-date on any changes that may occur to ensure that they are paying the correct amount of tax.
To learn about US tax for forex traders and corporate tax by country, read our article.
At times, taxes can be the deciding factor for whether or not an investment will be made. This article is a must-read if you are a Forex trader from the UK. However, before we begin to discuss your taxes on Forex trading, these are the things that you need to consider:
- Your taxes will depend on the kind of trader that you are. For example, you can be an investor or a gambler/speculator.
- The next deciding factor can be the type of instrument you plan to trade. For example, it could be CFDs or spread betting.
- The last factor will take into consideration your finances. This is a subjective point as every individual has a different financial circumstance. Your salary bracket, trading frequency, trade quantity, and more will be evaluated.
Once you have clarity regarding the above-stated points, we can move forward.
How do you pay tax on forex trading in the UK?
Usually, the majority of forex traders that trade CFDs in the UK pay taxes as Capital Gain Tax (CGT). So if your annual profit is less than £50,270, you will pay a 10% tax. The amount can be less than that if you have lost in previous years. However, if you trade spread betting, you will be tax-free for any profit.
If you trade forex as an additional side job and do not trade CFDs, you will pay tax based on the income tax rate.
Forex Income Tax in the UK as a side freelancer job
Let’s assume you work in a company and are the side gig freelancer forex trader, and you do not trade CFDs.
Forex income tax can be a confusing topic for freelancers in the UK, particularly those earning income from trading in foreign currencies.
At the basic level, if your forex trading is considered a side gig rather than your primary source of income, you will generally be covered by the Trading Allowance. This allows you to earn up to £1000 of extra income tax-free yearly. Any profits you make over this amount will be taxed at the standard 2022/23 Income Tax rates.
If you are a higher-income earner, you may also qualify for the Higher Rate Income Tax threshold, which means that your first £50,270 will be taxed at 20%, and any additional taxable income over this amount will be taxed at 40%. You may qualify for the Additional Rate of 45% if your taxable income exceeds £150,000.
See Income tax rate in the UK for 2023:
| Income in pounds | Tax rate | Income rate type in UK |
|---|---|---|
| Up to 12,570 | 0% | Personal allowance |
| 12,571 to L50,270 | 20% | Basic rate |
| 50,271 to 150,000 | 40% | Higher rate |
| over 150,000 | 45% | Additional rate |
To determine how much tax you need to pay on your forex earnings and ensure that you comply with all applicable tax laws, it is essential to consult with a professional tax expert or financial advisor who can guide you through the process and help minimize any potential liability.
Income tax for forex traders is calculated by calculating your taxable income (see Table above), adding your allowances, and subtracting any losses from previous years as a forex trader.
Forex Capital Gain Tax
Capital gains tax, or CGT, is a tax that applies to any profits you make from the sale of certain assets in the United Kingdom. The rates for CGT depend on your overall annual income and can be either 10% or 20% of your capital gain, depending on your income level.
All forex traders in the UK that trade forex in the form of CFDs pay Capital Gain Tax.
For most forex traders in the UK, CGT is not a significant concern, as their trading activities typically result in relatively small amounts of income. However, suppose you are making large amounts of profit from your trading activities. In that case, it is essential to be aware of the rules and regulations surrounding capital gains tax to avoid paying higher rates.
If you are a forex trader who earns less than £50,270 per year, you will pay 10% on any capital gains you make from selling assets. If your annual income exceeds this threshold, you will pay 20% on any capital gains you make.
Several things can impact the amount of CGT you may owe when selling an asset. For example, whether or not the asset was considered a business asset can affect how much tax you pay on any profits from its sale. Additionally, certain reliefs may be available to help reduce the amount of CGT you owe when selling an asset for a profit.
Suppose you are a forex trader in the UK and are concerned about how capital gains tax may apply to your trading activities. In that case, speaking with an experienced tax advisor who can help guide you through these complex rules and regulations is essential. With proper planning and understanding of CGT rules and regulations, you can ensure that any profits you make from selling assets are subject to the lowest possible taxation rates.
There are three tax categories for forex traders in the UK when we talk about CGT:
- If you are a part-time spread betting trader, you are tax-free.
- If you are a forex trader that total income and annual capital gains are less than £50,270, you are subject to a 10% capital gains tax (CGT).
- If you are a forex trader that total income and annual capital gains are more than £50,270, you are subject to 20% capital gains tax (CGT).
Forex trading Tax amount in the UK (Examples)
- Example 1: You trade forex (CFDs) using a forex broker. You made £11,000 profit at the end of the year. You will not pay tax because you have a £12,300 tax-free CGT allowance.
- Example 2: You trade forex (CFDs) using a forex broker. You made £21,000 profit at the end of the year. You have a £12,300 tax-free CGT allowance. So, in the future, you will pay a Capital Gains Tax of £870.
- Example 3: You trade forex (CFDs) using a forex broker. You made £61,000 profit at the end of the year. You have a £12,300 tax-free CGT allowance. So, in the future, you will pay a Capital Gains Tax of £5,970 because for more than £50,270, you are subject to a 20% capital gains tax, while capital gains less than £50,270 are subject to a 10% capital gains tax (CGT).
Is Forex Trading Tax-Free in the UK?
Forex trading is not tax-free in the UK. You are tax-free only if you are a part-time spread betting trader. However, if you are a forex trader, you are subject to capital gains tax.
Forex trading is not tax-free in the UK, as it is subject to capital gains tax. As a forex trader, you will need to report any profits you make on your taxes and pay taxes on them accordingly. However, if you are a part-time spread bettor rather than a full-time forex trader, you may be able to avoid paying taxes on your trading activity. This is because spread betting is typically classified as a form of gambling in the UK, which means that any trading profits you make may be exempt from taxes.
To engage in forex trading in the UK, you must be aware of your tax obligations and plan accordingly. You may need to work with a tax professional or consult government resources to ensure that you meet your reporting requirements.
Forex CFD tax in the UK
CFD forex traders are subject to a 10% capital gains tax (CGT) if their annual capital gains are less than £50,270 in 2023. However, yearly capital gains exceed £50,270, and CFD forex traders are subject to 20% capital gains tax (CGT).
Usually, forex traders use CFD brokers. So, for example, if you are a typical forex trader that has opened an account at a CFD broker and traded using the Metatrader platform, you are subject to capital gains tax (CGT).
Spread betting, in general, is not taxable, but the profits that the CFDs fetch you are taxable. However, things are not as black and white as they appear. Let’s explore this grey area further.
You will find three types of taxes in the UK. These are income tax, corporation tax, and capital gains. These three taxes, along with the kind of Forex trader you are, can decide how much tax you are liable to pay if you are trading Forex.
The first thing that needs to be done is the assessment of the trader’s status. Then, we will consider the instrument they are planning to trade and its intentions.
Remember that this article will give you a general outlook; assessing individual financial status can be tricky, and if you are unsure, you must take the help of a paid professional. You can hire a consultant or a professional accountant.
Status of a Forex Trader
Forex trading and exchanging Forex are two different things; in the latter, you might be doing it for short-term reasons like buying a product or service for individual or immediate consumption or traveling. However, if you belong to the former category, you will be doing it to profit. This is what makes you a trader.
There are two types of Forex traders. These are:
- Short-time trader – Speculator
This type of trader wants to make a profit but has actual plans. They would spontaneously and occasionally put a trade. They do not have any consistency or a proper method behind their actions.
Gamblers or speculators mostly have a primary source of income that is not related to Forex trading. However, it could be a full-time job, and since any gains from trading are secondary or additional, they are not liable to pay any taxes they made via this side hustle. Hence, they will be doing tax-free trading in the UK.
- The Investor
This is a serious trader, and mostly, trading is their primary source of income. An investor treats trading like a business. Since their primary income comes from trading Forex or activities related to Forex, they can pay taxes on it. It could be capital tax, corporation tax, or income tax. This will depend on individual profiles.
This clears up any confusion regarding the first point. Once you know whether you are a gambler/speculator or an investor, you will see if you pay the taxes. Although, this point alone cannot decide your tax liability. You need to consider the following two points as well.
Tradingdependss depends a lot on the instant that you are trading. Several instruments are available for trading, but there are two main options – CFDs and Spread Betting from a retail trader’s viewer point.
Let’s see how the UK tax system behaves with various trading instruments:
- Spread Betting
It is simpler than CFDs. Of course, everyone can take advantage of spread betting, but it is a great starting point for beginners.
For spread betting, you need to understand the concept of pips. Here, you bet on the price direction at a certain per-point amount. For example, according to you, GBP/increase by £1 per/pip. So, you will bet in that direction.
Since this type of trading is similar to gambling or speculating, it is not considered capital gains tax.
- CFDs
A CFD or a contract of difference is complicated but one of the most preferred trading Forex ways. Here, trades are sized according to ‘lots.’ Lot value can differ; for a primary currency, lot value is typically equivalent to $10/pip.
As a retail trader, you can easily find brokers who offer mini-lots. This will reduce the capital requirement from your end.
Trading in CFDs can incur additional costs like conversion charges. Since the base currency will depend on the underlying instrument you are trading, it will differ from your home currency. Therefore, your broker will charge you some amount for converting your profits and losses to your home currency.
For example, let’s assume that your house’s base currency is GBP, but you profit from the Japanese Yen. At the end of the trading day, your broker will convert your gains and losses to GBP, but you will have to pay conversion charges to them.
Spread betting is a short-term undertaking; it is tax-free. However, CFD traders are liable for forex trading capital gains tax in the UK.
Full-time trader vs. part-time trader
Another thing to remember before embarking on your forex trading journey is whether you plan on being a full-time or part-time trader. The amount of taxes you will pay will vary if you plan to work a full-time job and trade on the side, compared to being a full-time forex trader.
Part-time trader
If you plan on trading part-time, the amount you earn from spread betting will be considered a secondary income source. When this is the case, this income will be tax-free.
Full-time trader
It will be considered your primary income source if you plan on trading forex full-time. In this case, you will be required to pay income tax.
Conclusion
As a forex trader in the UK, it is essential to know the tax implications of your trading activities, particularly about Capital Gains Tax (CGT). Depending on your total income and annual capital gains, you may be subject to a 10% CGT rate or a 20% CGT rate.
To determine whether or not you need to pay CGT, it is essential to consider your investment strategy, the type of assets you trade, and other relevant factors. To minimize your tax liability as a forex trader in the UK and ensure that you comply with all applicable regulations, it is advisable to consult with a qualified tax professional or refer to government resources online.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
Igor regularly publishes trading-related videos on the Fxigor Youtube channel.
To contact Igor write on:
igor@forex.in.rs
