How is Forex Trading Taxed in the UK?

I mistakenly did not think about taxes at the beginning of my trading career in the UK. This led to some preventable errors, and I want to help others avoid the same mistakes. In this article, I will give a comprehensive overview, presenting all the key information in one place, covering:

• whether all forex traders pay taxes in the UK
• UK tax classification according to the HMRC
• income tax, corporation tax, and capital gain tax
• strategies to reduce taxable income
• a forex trading tax example
• determining tax status
• reporting and filing requirements

Let’s begin.

Understanding Forex Trading Taxes in the UK 

Like all countries, the UK has tax rules that its residents should follow religiously. The UK’s tax-collecting authority, HM Revenues and Customs (HMRC) does not take kindly to people not paying their taxes. It seeks to recover unpaid taxes, impose fines, and sometimes pursue criminal proceedings. That is not a road anyone would wish to travel down.

Do All Forex Traders Pay Taxes in the UK? 

I get asked this question most often, so let’s address it now. There are several scenarios where traders do not pay taxes on their trading profits:

1. Everyone can make up to £1000 annually in trading profits without paying taxes.                                                                                            
2. Spread betting, as opposed to Contracts for Difference (CFDs), is tax-free so long as the HMRC does not view your trading as your profession (i.e. for example, trading regularly and making most of your income from it). The tax-free status of spread betting is mainly why people are drawn to it compared to CFDs.
3. Individuals have a capital gains tax allowance (the Annual Exempt Amount) each tax year, allowing them to pay no tax on capital gains up to this level. The Annual Exempt Amount for the 2024/25 tax year is £3,000.

UK Tax Classification According to the HMRC 

Three tax categories can apply to traders: Capital Gains, Income, and Corporation Tax.

Capital Gains Tax (CGT) 

This is the most common tax CFD and Forex traders pay. Remember, Capital Gains Tax does not apply to spread betting, even for spread bets on Forex pairs. Three key things to know about CGT:

1. Capital gains tax is payable at two rates: 10% and 20%. Basic rate income taxpayers pay the 10% capital gains tax rate on the portion that keeps their income within the basic rate level. If some of the Capital Gains push their income over the basic rate, they pay the 20% rate on that portion of the Capital Gains.
2. The Annual Exempt Amount is the amount of Capital Gains an individual can make without CGT. For the 2024/25 tax year, the amount is £3,000.
3. Individuals can carry forward capital losses from previous years if their total taxable gain exceeds the tax-free allowance. If the losses reduce their gains to the tax-free allowance, they can carry the remaining losses to a future tax year.

Let’s see how to calculate this:

1. Work out how much taxable income you have - this is your income minus your Personal Allowance. Remember to subtract any other Income Tax reliefs to which you are entitled.
2. Next, calculate your total taxable gains.
3. Deduct your tax-free allowance from your total taxable gains.
4. Add this amount to your taxable income.
5. If this amount is within the basic Income Tax band, you pay 10% on your gains. For any amount above the basic income tax level, you pay 20% capital gains tax.

A Forex Trading Tax Example 

In this example:

• Taxable income (income minus Personal Allowance and any Income Tax reliefs) = £25,000
• And Forex or CFD profits = £13,400.

Step 1:

Deduct the Capital Gains tax-free allowance from your taxable gain. For the 2024/25 tax year, the allowance is £3,000. That leaves £10,400.

Step 2:

Add £10,400 to your taxable income = £35,400.

Because the combined amount of £35,400 is less than the basic rate band for the 2024/25 tax year (£37,700), you pay Capital Gains Tax at 10%. 

Result:

The Capital Gains Tax you pay on your Forex or CFD profits (assuming no other Capital Gains) is £10,400 x 10% = £1040.

Income Tax 

The UK has four tax bands for income tax measured from 6 April to 5 April the following year:

1. Personal Allowance: all income up to this level is tax-free.

2024/25: £12,570

2. Basic rate: a 20% tax rate.

2024/25: £12,571 to £50,270

3. Higher rate: a 40% tax rate.

2024/25: £50,271 to £125,140

4. Additional rate: a 45% tax rate (and no Personal Allowance).

2024/25: over £125,140

Therefore, the income tax paid depends on the amount of income in each band above the Personal Allowance.

Corporation Tax 

If you trade as a limited company, your corporation must pay corporation tax. The rates are:

1. 19% for companies with £50,000 or less in annual profits.
2. 25% (the “main rate”) for companies with £250,000 or more in annual profits.
3. For annual profits between £50,000 and £250,000, companies pay a sliding scale, the Marginal Relief Corporation Tax.

Corporations can deduct expenses, salaries, and pension contributions to calculate the final taxable profit. A common tax strategy is for individuals to pay themselves a salary or dividends from the corporation and leave the remainder of the profits in the company.

Limited company directors are responsible for keeping accounting records, paying corporation tax, and filing the company’s tax return within HMRC deadlines. Most individuals will need to involve an accountant to calculate and file corporation taxes, but the ability to reduce taxes with a corporation often makes it worthwhile to hire an accounting professional.

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Forex Taxes Explained 

Let’s review the primary Forex Trading Tax UK laws.

1. HMRC does not tax spread-betting or small amounts of amateur trading.

It views spread betting as gambling, which is not usually taxable in the UK. Spread betting has the disadvantage that losses cannot be offset against other Capital Gains or income. However, spread betting’s tax-free status is mainly why people are drawn to it compared to CFDs.

2. CFDs and Forex profits are taxable as capital gains.

To recap, capital gains tax is 10% or 20%, depending on whether the individual pays the basic income tax or higher income tax rates. Individuals cannot deduct expenses from Capital Gains but can carry forward Capital Losses from previous years.

3. Trading as a professional or business

A trader can be so active that the HMRC considers their trading a profession or a business activity. Once this happens, trading profits are subject to income tax (20-45%). The HMRC uses the “badges of trade” criteria to help determine if an individual crosses the threshold to pay income tax on their trading. Some of the criteria include:

• an intention to make a profit
• systematic and repeated transactions
• was the asset sold as part of trading activity? or to raise cash for an emergency?
• was money borrowed to buy the asset?
• interval of time between purchase and sale

Find the HMRC’s complete badges of trade list here with further explanations. Its criteria are subjective, and some individuals have gone to court with the HMRC over its decisions.

As a rule of thumb, ask yourself: are you putting the time, effort, and resources into trading that make it like a job? I like to think of a poker player who enjoys occasional weekend games versus one who treats it as a profession and plays poker to make an income every month. They are both engaging in the same activity, but the level of organization and time is different, and they will receive different tax treatment.

When the HMRC classifies an individual as trading as a business and subjects them to income tax, they are essentially self-employed. That means they can deduct allowable expenses to offset their taxes, such as:

• Office expenses: screens, computers, phone, internet
• Trading platforms, charting packages, access to trading signals and feeds
• Costs of your business premises, e.g., heating, lighting, rent, mortgage interest, business rates
• Training courses

4. Corporation tax through a limited company

Corporation tax starts at 19% for companies with less than £50,000 of profits, rising to 25% for companies with £250,000 or more of profits after expenses.

Eligible deductible expenses include all the costs of running the company (office rent and expenses, computer equipment, charting packages, training courses, etc.) plus salaries (e.g., your own or staff salaries) and pension contributions.

A limited company entails additional responsibilities, such as filing company taxes, which usually requires an accountant. However, depending on the level of trading, these extra administrative costs can be worthwhile in reducing taxes.

Key Tax Considerations for Forex Traders 

Strategies to Reduce Taxable Income 

1. Spread betting in the UK is the key to paying zero trading taxes so long as your trading is not so active that the HMRC sees it as your profession. Spread betting is popular because it is similar to CFDs: leveraged, easy to go long and short, and access to many markets.
2. Include any Income Tax Reliefs when calculating Capital Gains Tax or Income Tax.
3. Carry forward Capital Losses from previous years to apply to current Capital Gains.
4. Deduct expenses if your trading is subject to Income Tax. Expenses can include the cost of running office premises, screens, computers, internet, charting packages, and data feeds.
5. Consider a limited corporation. Filing corporate accounts to HMRC involves responsibilities, and you will probably need to involve an accountant or lawyer. However, the additional expenses can be worthwhile because the corporation tax payable can be lower than paying income tax.
6. For a limited company, make pension contributions. These are treated as a business expense and exempt from corporation tax. You will also save on national insurance contributions.

Tips for Managing Forex Taxes 

Keep Detailed Records 

It’s almost impossible to file taxes accurately without records. For Forex traders, this should include:

• Trade records: date and time of each trade, the currency pair or instrument for each trade, and the P&L of each trade
• Trading-related expenses: office, internet, computer equipment, data feeds, training, etc.

The best UK brokers automatically produce downloadable statements with all the trade history needed for tax purposes, rather than clients having to record it manually. Ensure you save the statements, especially when changing brokers.

Determining Tax Status 

There are three keys to understanding tax treatment:

1. Are you spread betting as a non-professional? If yes, your trading profits will most probably be tax-free.
2. Are you trading CFDs or Forex as a non-professional? If yes, you will probably pay Capital Gains Tax (10-20%).
3. Is your trading like a job with regular hours, frequent trading, and forming a substantial part of your income? If yes, there is a good chance the HMRC will apply income tax (20-45%) instead of Capital Gains, even for spread betting.
4. Lastly, you can set up a limited company and pay corporation tax instead, which may have the lowest tax burden depending on your trading.

Reporting and Filing Requirements 

1. You must file a self-assessment tax return for Capital Gains or Income Tax not collected at source.
2. If you are a director of a limited company, you are responsible for paying your Corporation Tax bill 9 months after the end of the company’s accounting period and filing tax returns 12 months after the accounting period (late filing penalties apply).

Conclusion 

To summarize Forex Trading Tax UK: spread betting (when the activity is not at the level of a profession) is tax-free. CFD trading and Forex trading are subject to Capital Gains Tax (10-20%). Capital Gains does not allow for deductible expenses but allows previous years’ Capital Losses to be carried forward. When the HMRC views an individual’s trading as a profession or business activity (they use the “badges of trade” criteria to make this determination), trading profits are subject to Income Tax (20-45%). Income Tax allows deductible expenses. Traders can also set up a limited company and pay Corporation Tax (19-25%) on profits after expenses, and they can pay themselves a salary or dividends from the company.