TaxScouts -> Guides
- 3 min read
- Last updated 26 Mar 2024
Are you a pattern day trader or thinking about becoming one? Go you! Although the tax rules for day trading can be pretty confusing. But don’t worry, because we’ve broken it all down for you!
Firstly, what is a pattern day trader?
A trader is someone who buys and sells securities for short-term profit. Securities are shares, bonds, crypto, stocks, etc. And they’re bought under a massive system that we know as the financial market.
Not everyone who trades falls into the pattern day trader category, though. To gain this status you must carry out four or more trades within five trading days. 🗓️
So basically, this ain’t your first rodeo.
What taxes do you have to pay as a pattern day trader?
Again, the tax rules for traders can be pretty confusing so there’s no one-fit answer. But if you’re a pattern day trader, these three taxes might apply to you:
- Income Tax
- National Insurance Contributions
- Capital Gains Tax
Income Tax
If you’re smashing your way through the market and your income exceeds the Personal Allowance of £12,570 per year (in the 2024/25 tax year), you’ll have to pay Income Tax at the following rates:
- 20% if your income is between £12,571 – £50,270
- 40% if your income is between £50,271 – £125,140
- 45% if you earn above £125,141
Many day traders probably don’t have time for other jobs whilst having to constantly monitor the market. But if you do, kudos to you! 🫡
In this case, you’ll have to add all your income together at the end of the tax year. Any income earned as an employee will be taxed automatically through PAYE but you’ll still have to include this on your Self Assessment along with your self-employment income.
If you earn less than £1,000 a year from self-employment, you’ll be entitled to the Trading Allowance. This means you won’t pay tax on anything up to that £1,000. In fact, you won’t even have to report it to HMRC.
National Insurance Contributions
You probably have to pay National Insurance if you fall into any of these two categories:
- You’re self-employed and make a profit of £6,725 or more a year and over £12,570 in a tax year
- You’re an employee earning above £242 a week
Your National Insurance class depends on your individual circ*mstances. For a detailed breakdown, have a look here.
🚨From 6 April 2024 (the 24/25 tax year onwards),Class 2 National Insurance is being scrapped. If you’re under the threshold and pay them voluntarily to qualify for benefits, you’ll still be able to do so.
At the same time, Class 4 is reducing from 9% to 6%.
Capital Gains Tax
Capital gains tax (CGT) is due when traders sell their assets and make profit above £3,000 in the 2024/25 tax year (previously halved from £6,000 in the 23/24 tax year).
It doesn’t matter whether you’re self-employed, a part-time or full-time day trader. As long as your gains exceed the threshold, you’ll be liable for capital gains tax.
How much capital gains tax you pay depends on how much you earn, but the two rates are:
- 10% (the basic rate)
- 20% (the higher rate)
Quick note:
👉 You won’t have to pay CGT until you sell your assets
👉 You don’t pay Capital Gains Tax when gifting to your spouse or a registered charity
Your situation
Tax and profit
Your profit from
shares£20,000
Incl. £12,300 tax-free CGT allowance
?
Capital Gains Tax to pay
£1,413
Profit after tax
£18,587
How your capital gains tax is calculated
Your total capital gains tax (CGT) owed depends on two main components:
- How much you earn in total
- What type of assets you sell
Your overall earnings determine how much of your capital gains are taxed at 10% or 20%.
Our capital gains tax rates guide explains this in more detail.
In your case where capital gains from shares were £20,000 and your total annual earnings were £69,000:
Capital gains tax (CGT) breakdown
You pay no CGT on the first £12,300 that you make
You pay £127 at 10% tax rate for the next £1,270 of your capital gains
You pay £1,286 at 20% tax rate on the remaining £6,430 of your capital gains
How does a pattern day trader pay their taxes?
Many pattern day traders are self-employed. So just like self-employed musicians, hairdressers etc., pattern day traders get to join in the fun of registering for Self Assessment and filing a tax return at the end of the tax year. Woohoo. 🥳
Not all traders work for themselves though. They can also be employed by investment banks, fund managers and stock exchanges. In this case:
- Income is taxed automatically through PAYE (at regular Income Tax rates)
- Capital Gains Tax can be paid using the Real Time Capital Gains Tax Service
Need a 👋 sorting your Self Assessment?
Did we mention? If you’re a pattern day trader, one of our accountants can sort your Self Assessment tax return for you. Because let’s face it, the fluctuating trade market is stressful enough. Taxes don’t have to be too!
Find out more about what we can do for you here.
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- crypto
- hmrc
- invest
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