I was more than a little confused by something I read recently which I thought would usefully explain the difference between the two types of income funds - income and accumulation (I think). I had thought that income paid out dividends to somewhere outside of the fund e.g. bank account and accumulator automatically purchased more of the fund. What I read suggested this was incorrect. Please could you clarify the differences.
Maybe a silly additional questions - for income reinvested in a fund do you have to declare on your tax return as dividends or does it get declared as part of the capital gains of your fund holdings?
I can understand the confusion. You would often see the abbreviations Inc and Acc which stand for Income and Accumulation units. If you have the Inc units of a fund then the income is typically paid out to the investor. If you have the Acc units, the income such as interest or dividends generated by the investments are re-invested into your fund.
Regardless of whether the income is paid out or re-invested, you may need to declare it on your tax return but you have allowances available which you can use. Income from investments are either classed as interest (which is usually when your investment content is primarily corporate bonds or gilts) or dividends (when the investment content of your fund is primarily shares). Your investment provider can give you a tax statement after each tax year that would clearly show you if you received dividends or interest.
If your investments are held in an ISA then you do not need to declare the income on a tax return. In addition you have a dividend allowance of £2,000 available so if the total amount of dividend income that you receive in the tax year is below £2,000 then you do not need to declare it. Please be mindful that this dividend allowance applies to all dividends that you receive in a tax year and not per investment. If your investment generates interest then this interest counts towards the £1,000 tax free interest allowance if you are a basic rate tax payer or the £500 tax free interest allowance if you are a higher rate taxpayer. There is also a personal savings allowance if your income is below a certain level.
Another thing to bear in mind: if the investments are not in your own name, the taxation is different for companies and entities such as Trusts.
I hope this helps,