Do Forex Traders Pay Tax In The UK?
The Four Types Of Taxes That Affect UK Forex Traders

Like many investors, you're undoubtedly scratching your head over how to account for your revenue from forex trading as tax season approaches. The topic of how UK residents should account for forex trading earnings still lingers, even though when you started trading, your goal was to reduce red tape and uncertainty in your professional life, not create more. What kind of trading instrument you employ, whether trading is your main source of income, and how seriously you trade are all important considerations when determining the answer.
If forex trading is a hobby, the trading allowance will cover you. It allows you to earn an additional £1000 tax-free. Profits above £1000 are subject to taxation. As a full-time self-employed investor, you will be taxed on any profits that exceed the tax-free Personal Allowance.
How do forex traders pay taxes? As you might expect, the answer is not as straightforward as it appears. Because the vast majority of forex traders lose money, it is not in HMRC's best interests to allow everyone to deduct their losses from their other income.
As a result, different trading instruments have different rules. And it all depends on your earnings.
There are four types of taxes that affect forex traders:
Income tax is the tax you pay on your total earnings.
Corporation tax is a tax levied on the earnings of a limited company.
Capital Gains Tax is a tax on profits from the sale of assets.
Stamp Duty Reserve Tax - a tax or duty levied on stock purchases.
Income Tax in the 2022/23 tax year
If you are a part-time trader with a full-time job, you will pay tax only if your profits exceed £1,000 at the standard income tax rates. If you are a full-time trader, then your taxation rates are as follows:
Income | Tax rate | |
Upto £12,570 | 0% | Personal allowance |
£12,571 to £50,270 | 20% | Basic rate |
£50,271 to £150,000 | 40% | Higher rate |
over £150,000 | 45% | Additional rate |
As a full-time self-employed investor, your profits over the tax-free Personal Allowance will be taxed.
You must register as self-employed and declare your income to HMRC by October 5th. Following that, you will file a tax return to pay the tax you owe.
What Type of Forex Trader Are You? Speculator or Investor
Whether HMRC regards you as a speculative gambler or a serious trader has a significant impact on your tax bill. People who trade the same way that others play poker benefit from tax-free gains but bear the consequences of losses. Those who work as business traders or investors must pay taxes on their earnings. They are also protected from losses, as they can offset bad trades against other business income or deduct them entirely.
Your Trading Instrument and Forex Taxes
Once you've determined which tax scheme applies to your specific situation, you'll need to consider the type of trading instrument used in each transaction. This will affect the other two tax regimes we mentioned: capital gains and the Stamp Duty Reserve Tax. Because you don't own the underlying assets in spread betting, you won't have to pay capital gains tax or Stamp Duty Reserve tax on any profits. However, because HMRC considers this type of trading activity to be gambling, you must report this income as gambling winnings.
If you trade CFDs, you must pay capital gains tax (CGT) on any profits generated by your trading. For basic rate taxpayers with total incomes between £12,571 and £50,270, CGT is 20%. (the basic rate tax bracket).
If your total annual income from CFDs is £50,271 or more, you fall into the higher tax bracket, and your profits are subject to a 40% CGT tax. However, do not immediately stop trading CFDs because there is a CGT tax allowance for the first £12,300, which should not be overlooked.
You can keep track of your trades or ask your broker for a P&L (profit and loss) statement to file your tax return. Another crucial point to remember is that you may be eligible for tax relief if you suffer losses from your trading activity.
Your Tax Status and Forex Taxes
Suppose you use forex trading as a secondary source of income without forming a limited business or registering as a sole proprietor. In that case, you will be required to pay personal income taxes on the profits from your foreign exchange transactions. If trading is your main source of income, you must register with HMRC as a self-employed person; you will still be subject to the personal income schedule of taxes, though. Gains from forex trading won't be subject to personal income tax for traders operating as limited entities. Instead, the trader will be responsible for paying personal income taxes on any distributions made from those gains, while the limited company will pay taxes on earnings earned through trading.
Is There Anything Else To Think About?
Yes, there are a few factors to consider when determining whether you may owe tax on your trading income.
The first thing is the cost. You may deduct your expenses from your income when calculating your taxes if you are a full-time trader and are not claiming the Trading Allowance. In general, allowable expenses are any costs you have incurred solely for your trading firm.
The size of your trading company is the second thing you should consider. When you're unsure of whether you owe taxes, it's crucial to ask yourself the following questions:
- How much money do you make in total?
- How frequently do you trade, and how much?
- Do you pay taxes on your remaining income?
- What is your typical tax rate?
HMRC will probably contact you if you make a lot of money from trading and haven't yet paid tax on your gains.
Case Studies
Let's look at the following hypothetical people who all traded forex during the 2022 tax year to see how these three variables interact.
Caroline enjoys her profession as a freelance project manager, but she also occasionally engages in spread betting to earn a little extra money and keep her mind sharp since she finds the intellectual challenge of day trading intriguing. Caroline won't be required to pay any personal income tax, capital gains tax, or Stamp Duty Reserve tax because HMRC views her gains as gambling winnings and the precise instrument she picked as entirely speculative.
Sam manages properties full-time and earns additional money by trading FX contracts for difference. Although he's had some success, earning roughly £18,000 this year, his trading income isn't yet sufficient for him to leave his day job. Oliver's earnings from forex trading are subject to a £1,000 personal allowance deduction from HMRC, while the remaining £17,000 is subject to personal income tax at the basic rate of 20% for 2020–2022. He does not need to register with HMRC as a sole trader or self-employed person, but he is also not permitted to deduct any business losses from his income.
Alan is a full-time investor who relies solely on trading in the currency market and other markets to make ends meet. He earned £120,000 from FX trading this year. Ali, like Oliver, is entitled to a personal allowance of £1,000 and will pay taxes on his remaining earnings under the personal income tax system. He must, however, register with HMRC as a self-employed person and submit a Self-Assessment tax return. Any CFD trading exceeding the Capital Gains Tax Allowance will require him to pay capital gains tax.
Bella runs a prosperous chain of women's apparel stores and earns money by day trading forex. Gemma's clothes company made £250,000.00 in revenue in 2022, although she lost money in the market by roughly £25,000.00. Fortunately, Gemma has the option to credit her trading losses against income from her clothes business, reducing her overall obligation because she trades forex to make money rather than just for fun.
Conclusion
The forex market offers a thrilling prospect for retail investors, with over 10 million traders active globally. By working with a reputable broker, such as Admiral Markets or eToro, and exercising additional caution when completing a tax return, traders paying taxes in the UK can reduce their risk of becoming the subject of an investigation or receiving a tax penalty from HMRC.
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