Why You Don't Pay Tax Twice on Reinvested Fund Income

Where the second tax would come from

An accumulation fund ("Acc") doesn't pay out the income it earns. It reinvests it for you. HMRC calls that a notional distribution, meaning a payout you never received in cash. In a UK unit trust, no new units are issued. The value of your existing units goes up instead. This guide covers funds held in an ordinary account, outside an ISA or pension.

For Income Tax, HMRC treats the income as yours whether or not you were paid. For UK unit trusts and open-ended investment companies, amounts available for distribution are treated as dividends. Say a fund reinvests £130 of income for you this year. That £130 counts towards your dividend allowance, and anything above the allowance is taxed. For 2026–27 the allowance is £500* and dividends are taxed at 10.75%* for basic rate taxpayers and 35.75%* for higher rate taxpayers.

* Correct at the time of writing. Rates and allowances can change, so check HMRC's current Capital Gains Tax rates and tax-free allowance on GOV.UK.

This is why some investors keep accumulation funds in an ISA or a SIPP and distribution funds ("Dist" or "Inc") in an ordinary account. You don't pay tax on dividends from shares in an ISA, or Capital Gains Tax on ISA gains. Income and gains inside a registered pension scheme, which includes a SIPP, are exempt from Income Tax and Capital Gains Tax too. So reinvested income inside those wrappers creates no tax to track.

In an ordinary account a distribution fund pays the income out, so you see each dividend arrive and your cost stays what you paid. With an accumulation fund you have to keep a running total of reinvested income and add it to your cost yourself. The tax on the income is the same either way, because a payout and a reinvested amount both count towards your dividend allowance. Only the record keeping differs. A payout also leaves you holding cash, and if you reinvest it yourself, the new units are a purchase like any other. Both wrappers have their own limits and rules for taking money out, which this guide doesn't cover.

Now take an accumulation fund in an ordinary account and sell it. The units are worth more, partly because the fund kept that £130 for you. Your gain is the sale price minus what you paid, so the £130 is included in the gain and would be taxed a second time, as a capital gain. The rules deal with that by adjusting your cost.

The adjustment that stops it

If a notional distribution is subject to Income Tax, HMRC lets you treat the amount as extra cost of your accumulation units. HMRC's helpsheet HS284 says so, and its Capital Gains Manual gives the same rule at CG57707. HMRC's wording is "subject to Income Tax". It doesn't say how income inside your dividend allowance is treated, so if that applies to you, ask an adviser. A higher cost means a lower gain, so the reinvested income is taxed once, as income, and not again as a gain.

HMRC treats units in a unit trust like shares in an ordinary company, and the same goes for an open-ended investment company. So your units sit in a section 104 pool, the way HMRC averages the cost of identical units bought at different times. The pool holds the total number of units and their total cost. Each notional distribution adds to the total cost and adds nothing to the number of units, so the average cost per unit goes up. When you sell some units, the cost you deduct is the pool's total cost multiplied by the units sold and divided by the units held.

Accumulation units and income units count as different classes of unit. Switching from one to the other in the same fund is treated as a share reorganisation, not a simple sale and rebuy.

A worked example

Say you buy 1,000 units in a UK global index accumulation fund for £10,000. Over the next three years the fund reinvests £120, £130 and £140 of income for you, £390 in total. You pay Income Tax on each amount. Later, in 2026–27, you sell all 1,000 units for £14,000. You pay higher rate tax and have no other gains that year.

* Correct at the time of writing. Rates and allowances can change, so check HMRC's current Capital Gains Tax rates and tax-free allowance on GOV.UK.

The £93.60 is the £390 of reinvested income multiplied by 24%*. It's the tax you'd pay a second time on income you'd already paid tax on. If your gain is inside the £3,000* allowance anyway, the adjustment saves nothing that year, but the higher cost still counts if you sell more units later.

Where to find the amounts, and what to keep

The fund manager or your platform reports the reinvested income, usually on an annual tax statement or a tax voucher. Keep every reinvested amount you paid Income Tax on, with its date and the fund it belongs to. You'll need the running total when you sell, which may be many years later. If you have gaps, ask the platform or the fund manager for past statements before you work out your gain.

Our calculator doesn't add reinvested income to your cost. The gain it shows for an accumulation fund is before the adjustment. Take your total reinvested income off it, or work out the pool cost including it. Reporting the gain on your return uses the adjusted figure.

Funds based outside the UK

Offshore funds, such as many ETFs based in Ireland or Luxembourg, have their own version of the same idea. The income you're taxed on without receiving it is called excess reportable income, and it's added to your cost in the same way. Our ERI guide covers where to find the figures and which dates matter. A reporting fund is one approved by HMRC to report its income to UK investors. A fund that isn't one has different rules, and the gain can be taxed as income. Don't assume the added-to-cost rule applies.

When to get help

A regulated tax adviser can look at your own situation. It's worth asking one in these cases: missing records across several platforms, an offshore fund that isn't a reporting fund, holdings in a trust, or not being UK resident.