Whether you choose income or accumulation will determine what happens to any income generated by a fund.
Here, we look at:
Do you pay tax on income and accumulation funds?
Should you invest in income or accumulation funds?
Remember, investing has its ups and downs, so you could get back less than you invest.
An income fund aims to provide you with regular income from your investments – through dividends or interest payments. These types of funds typically show as ‘Inc’ in the fund’s name or description.
If the investments within the fund generate interest or pay dividends, you’ll receive your share as a payment into a designated account.
The amount you receive (if any) can vary depending on how the fund performs. You could then decide whether to hold that cash in an account, withdraw it, or invest it.
An accumulation fund allows any income generated to build up (or accumulate) in the fund. Accumulation funds are also known as growth funds and typically show as ‘Acc’ in the fund’s name or description.
Even if the investments within the fund generate interest or pay dividends, you wouldn’t receive any income directly.
Instead, the fund manager will use the income to buy shares on behalf of the fund – increasing the value of the units of the fund. This means you’re reinvesting the income and increasing the total amount you have invested.
Both income and accumulation funds are subject to tax.
But any investments held within an ISA or self-invested personal pension (SIPP) are not subject to UK income tax or capital gains tax on any income or growth.
If your investments are held outside of an ISA or pension, you might need to pay income tax on any interest and dividends. However, you may have a tax-free Personal Allowance, depending on how much you earn.
You also have a dividend allowance each year. You only pay tax on dividend income that exceeds the dividend allowance.
If you sell investments that have increased in value, you may have to pay capital gains tax. For the current tax year, the capital gains tax allowance is £3,000, so any gains up to that amount are exempt.
The value of any tax benefits will depend on your individual circumstances and tax rules could change in the future. Tax-free means free of liability to UK income tax or capital gains tax.
The type of fund you choose will come down to your personal investment goals.
If you want to receive an income from your investments – to supplement your pension pot in retirement, for example – you might consider an income fund.
But if you’re happy to keep the money invested for the long term (at least 5 years) and your focus is purely on investment growth, accumulation funds may be more suitable.
Discover how to create, track, and manage your investment goals in the latest version of the HSBC UK Mobile Banking app.
Remember – the value of your investments can go up and down and you could get back less than you invest. Eligibility criteria & fees apply.
