Capital Gains Tax vs Income Tax: The Difference That Costs People Thousands

Capital Gains Tax and Income Tax sound similar — which is exactly why so many people confuse them.

That confusion often leads to unexpected tax bills, missed HMRC deadlines and overpaying tax after selling property or investments.

Our beginner-friendly guide explains capital gains tax vs income tax, using simple examples, so you know can get to grips with what applies — and when.

Getting to Grips with CGT vs Income Tax

Income Tax is tax on money you earn.

You usually pay Income Tax on:

• wages or salary

• self-employed income

• rental income

• pensions

• interest and dividends (above allowances)

Most people pay Income Tax automatically through PAYE or via Self Assessment.

Simple example

You earn £45,000 a year from your job. Income Tax is deducted from your payslip. No asset sale involved.

Lesson 1: What is Income Tax?

Capital Gains Tax is tax on the profit you make when you sell something that has increased in value.

You may pay CGT when selling:

• a second home or rental property

• shares or investments

• cryptocurrency

• land or business assets

CGT is not charged on earnings — it’s charged on growth.

Simple example: You buy shares for £10,000 and sell them for £20,000. The £10,000 profit may be subject to CGT.

Lesson 2: What is Capital Gains Tax (CGT)?

The key difference is what you’re being taxed on.

• Income Tax: money coming in regularly

• Capital Gains Tax: profit made when you sell an asset

This is why CGT often catches people off guard — it’s not routine.

Lesson 3: What is the Biggest Difference Between Income Tax and CGT?

Income Tax and CGT have different tax rates.

Income Tax rates increase sharply as income rises

CGT rates are usually lower, but depend on:

• your income level

• the type of asset sold

For example: Two people sell the same property. The higher earner pays more CGT — even though the gain is identical.

Lesson 4: Tax Rates Are Not the Same

Each tax has its own allowance.

Income Tax has a personal allowance

CGT has an annual tax-free allowance (currently £3,000)

Using one allowance does not protect you from the other. This is a very common mistake.

Lesson 5: Their Allowances Work Differently

Your Income Tax band can push your Capital Gains Tax higher.

Example

Person A earns £30,000. Person B earns £70,000.

Both sell an asset with a £20,000 gain.

Person B is likely to pay CGT at a higher rate.

Same gain — different tax bill.

Lesson 6: Income Tax Can Affect Your CGT Bill

Most people struggle because:

• CGT is less familiar than Income Tax

• online calculators oversimplify

• reliefs are missed

• deadlines are misunderstood

CGT mistakes are usually discovered after HMRC gets involved.

Lesson 7: Why People Get it Wrong

Understanding the difference between Capital Gains Tax and Income Tax helps you:

• plan asset sales properly

• avoid surprise tax bills

• stay compliant with HMRC

• reduce tax legally

This is especially important for property owners and investors.

Lesson 8: Why This Difference Matters

Income Tax is something most people expect.

Capital Gains Tax often isn’t.

Understanding capital gains tax vs income tax is the first step to avoiding nasty surprises — especially when large sums are involved.

If you’re unsure, guessing can be expensive. Getting it right from the start is usually the safest option.

👉 CapitalGainsTax.co.uk specialises in accurate, HMRC-compliant Capital Gains Tax calculations and advice — helping you understand what you owe and avoid costly mistakes.

If you’re selling property, shares, or inherited assets, expert support can make a significant difference.

📧 info@capitalgainstax.co.uk

📞 0800 0016 878

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