What is the difference between income and accumulation units?
For most funds, you can choose to buy ‘income’ or ‘accumulation’ units. The difference is in how they handle the income (i.e. the dividends or interest) generated by the fund.
For income units, this income is paid into your account directly, as cash. For accumulation units, this income isn’t paid out to you directly, but reinvested into the fund itself. This has the effect of raising the price of each unit, generating extra growth and increasing the value of your investment.
If you hold the fund in a SIPP or an ISA, this income won’t be taxed. But if you hold the fund in a Dealing account, it will be taxable. It’s important to know that this includes income from accumulation funds – even though you’re not paid it directly.
If you have a Dealing account, dividends for both income and accumulation units will be included on your annual tax certificate. The book cost of the accumulation units you hold (i.e. the amount you paid for it) increases by the same amount as the dividend – reducing your liability for capital gains tax, ensuring you don’t pay tax twice.