How are accumulation units taxed compared to income units?

Full answer

Accumulation and income units are two share classes of the same fund. Income units pay out distributions (dividends or interest) as cash; accumulation units reinvest that income inside the fund, so your unit price rises instead. Crucially, HMRC taxes the income identically in both cases -- holding accumulation units does not defer or avoid income tax. You receive a 'notional distribution' that must be declared even though no cash reaches your bank account. Who it affects: anyone holding funds outside an ISA or pension. Inside an ISA (GBP 20,000 allowance for 2026/27) or a SIPP, the distinction is irrelevant because the income is sheltered. Outside a wrapper, equity-fund distributions are dividends -- taxed at 10.75% basic, 35.75% higher, 39.35% additional, after the GBP 500 dividend allowance. Bond-fund distributions are interest, taxed at your income tax rate after the Personal Savings Allowance. The trap comes at sale, for Capital Gains Tax. With accumulation units, every reinvested distribution -- on which you already paid income tax -- counts as 'equalisation' or an addition to your base cost. If you ignore it, you double-count the same money and overpay CGT. Keep records of all notional distributions and add them to your acquisition cost. Worked example: you hold accumulation units, and over five years receive GBP 2,000 of notional dividend distributions, taxed each year as dividend income. You bought for GBP 10,000 and sell for GBP 15,000. Your gain is not GBP 5,000 -- your base cost is GBP 10,000 plus GBP 2,000 reinvested distributions = GBP 12,000, so the gain is GBP 3,000, which is within the GBP 3,000 Annual Exempt Amount for 2026/27. Use the dividend tax and capital gains calculators to model both the annual income charge and the eventual disposal.

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