Income vs accumulation funds: Which is best?

You're ready to invest. You've picked a solid fund. You're feeling confident... and then, right at the end of the name, you see 'Inc' or 'Acc'. What do they mean? And why could choosing the wrong one cost you thousands of pounds?

Income funds: regular payouts

Income funds, labelled 'Inc' or sometimes called Distributing or 'Dis', pay out dividends or interest in cash, dropping in your trading or bank account at set intervals (monthly, quarterly, or yearly).

Who might prefer them?

• Retirees using the income for living expenses, cruises, or spoiling the grandchildren
• Anyone who wants regular cash flow from their investments
• Investors who reinvest manually into other funds or stocks.

Accumulation funds: reinvest and grow

Accumulation funds, often labelled 'Acc', reinvest dividends automatically, compounding your returns over time. You won't see cash payouts, but your investments will snowball as you earn returns on returns.

Who might prefer them?

• Long-term investors, happy to let their money sit and grow
• Younger investors, still earning a salary and not needing extra income
• Anyone who doesn't want the hassle of reinvesting payouts manually.

How to tell whether a fund is accumulation or income

Unlike most aspects of fund names, deciphering whether one is income or accumulation isn't too confusing. As we mentioned, this will usually be labelled within your investing platform of choice, as well as on the fact sheet. Here's an example from Invesco where you can see that 'Dist' comes at the end of the fund name:

You'll notice that the ticker symbol (the bit in blue in the image above) will also change depending on the share class. For example, Invesco FTSE All-World UCITS ETF has the ticker FTWD for the income version of the fund, and FWRG for accumulation.

Income vs accumulation: which makes you more money?

At first glance, picking between Inc and Acc might seem about as consequential as choosing between McVitie's digestives and Tesco's own-brand.

After all, they are the same fund, containing the same investments.

But over the long-term, the differences can be pretty significant.

To understand why, let's start by looking at the two ways that investment funds make money:

• Capital growth: the value of the assets in the fund goes up.
• Dividends or interest: payouts from shares or bonds held in the fund.

Both Inc and Acc units benefit from capital growth, but there's a crucial difference: only Acc units reinvest dividends instead of paying them out as cash. This means those dividends earn returns of their own, creating a compounding effect that snowballs over time.

So, how much of a difference does that make? Let's look at a simple example.

Peter vs Paul: A 20-year experiment

Imagine two brothers, Peter and Paul, each invest £10,000 into the same fund. It grows at 5% per year and pays out 3% in annual dividends.

• Peter chooses Inc units, so he takes the 3% dividend as cash each year.
• Paul chooses Acc units, so his dividends are reinvested to buy more fund units.

Here's how their investments play out over 20 years:

Year	Peter (Inc) - total value	Paul (Acc) - total value	Extra growth from reinvesting
5	£12,763	£14,693	+£1,930
10	£16,289	£21,589	+£5,300
15	£20,789	£31,722	+£10,932
20	£26,533	£46,610	+£20,077

The difference becomes even clearer in the bar chart below:

By the end of 20 years:

• Peter (Inc) has a total of £26,533, including his original £10,000 and all the dividends he withdrew.
• Paul (Acc) has a total of £46,610, because his reinvested dividends kept growing.

That's a difference of £20,077, just by letting dividends reinvest rather than taking them out as cash.

But what if you reinvest dividends elsewhere?

Acc might have trounced Inc like an F1 car racing a three-wheeled shopping trolley in the previous example, but that doesn't mean Inc can't come out on top under the right conditions.

If you take the income from an Inc fund and reinvest it in a better-performing fund, you could leave Acc units in the dust.

Or, you could stick it in a savings account earning 2% and potentially miss out on thousands. Or, worse, blow it all on a weekly Deliveroo habit.

The point? It's not just about Inc vs Acc, it's about what you do with the income that matters.

And let's not forget fund performance. If you pick a fund that goes down in value over time, then cashing out along the way – even just to blow it on a fleet of swan-shaped pedal boats – might have been the best move after all.

The thing is that these strategies require consistent maintenance and effort. Dividends are normally paid straight into the cash balance on your brokerage account, so if you do want to reinvest them, you'll need to stay on top of things and not just let them languish in financial purgatory.

Now that we've seen how Inc and Acc funds grow, let's talk about something every investor needs to consider: tax.

Note: this next section won't apply to investments held within an ISA, as you're able to invest up to £20,000 a year without any tax on your gains.

Talking taxes

If you've already used up your ISA allowance for the year, any earnings from Inc or Acc units will be taxed in the same way. The difference is how and when the tax is paid.

Inc units: Paying tax on what you receive

With Inc units, you'll receive cash payouts, either as dividends or interest. That means you may have to fill out a self-assessment tax return so HMRC knows what you owe.

Much of it depends on your income level, which determines both your income tax, dividend tax, and capital gains tax rates (see table below).

Tax band	Income range (2024/25)	Income tax rate	Dividend tax rate	Capital gains tax rate
Basic rate	£12,571 - £50,270	20%	8.75%	18%
Higher rate	£50,270 - £125,140	40%	33.75%	24%
Additional rate	Over £125,140	45%	39.35%	24%

Just remember to keep a beady eye on these rates, as they are subject to change with government budgets. Any updates will be listed here.

Dividends from Inc units

Here's how tax works for dividends (money companies pay to shareholders):

• You can earn up to £500 in dividends tax-free.
• Anything above this is taxed based on your income tax band:

1. Basic rate: 8.75%.
2. Higher rate: 33.75%.
3. Additional rate: 39.35%.

Example

Susan earns £100,000 a year, so she's a higher rate taxpayer. She receives £2,000 in dividends from her Inc units. The first £500 is tax-free, but the remaining £1,500 is taxed at 33.75%, meaning she owes £506.25.

Interest from Inc units

Now, let's talk about interest from Inc units (like earnings from bonds or cash investments).

You get a tax-free personal savings allowance of:

• £1,000 if you're a basic rate taxpayer
• £500 if you're a higher rate taxpayer
• £0 if you're an additional rate taxpayer.

Any interest above your allowance is taxed at your usual income tax rate (20%, 40%, or 45%).

Example

Simon earns £30,000 a year (basic rate taxpayer) and gets £1,500 in interest from his Inc units. His first £1,000 is tax-free, so he only pays 20% tax on the remaining £500, which comes to £100.

Capital gains tax: When you sell Inc units

If your Inc units grow in value and you sell them, capital gains tax (CGT) may apply.

• You can make £3,000 in capital gains tax-free.
• Anything above this is taxed at
  • 10% for basic rate taxpayers.
  • 20% for higher or additional rate taxpayers.

Example

You invest £10,000 for 20 years, and the value grows to £26,533. That's a gain of £16,533.

• The first £3,000 is tax-free.
• The remaining £13,533 is taxed at 20% (if you're a higher rate taxpayer), meaning you owe £2,707.

Read more: how much tax do you pay on index funds in the UK?

Your own tax liability is based on your individual circumstances. Tax rules are always subject to change.

Acc units: paying tax even if you don't get a cash payout

Things work a little differently with Acc units because earnings are reinvested instead of paid out.

Even though you don't see the cash, HMRC still taxes the income as if you received it. This is called a "notional distribution", and you'll need to report it on your tax return each year.

You should normally be able to download a statement from your broker that provides these figures.

Example

You invest £10,000 in Acc units, and in year 15, your dividends total £1,360.

• The first £500 is tax-free.
• The remaining £860 is taxed based on your income tax band (8.75%, 33.75%, or 39.35%).

Capital gains tax on Acc units

When you sell Acc units, you need to adjust for the tax you've already paid on reinvested income.

• First, subtract your original investment (£10,000) from the final value.
• Then, subtract any taxed income over the years (so you're not taxed twice).

Example

After 20 years, our Acc units are worth £46,610.

• Your original investment was £10,000.
• You've already paid tax on £20,077 in reinvested income.
• That means your actual capital gain is £16,533, the same as someone with Inc units.
• You pay the same £2,707 in capital gains tax (if you're a higher rate taxpayer).

P.S., We've also covered this topic over on our YouTube channel. Check out the video below:

Making a switch

You're not locked into your choice between Inc and Acc units. You can switch if your investment goals change, such as moving from Acc to Inc as you near retirement.

If you're investing through an ISA or SIPP, switching between Inc and Acc units has no tax implications at all. Outside these tax wrappers, most investors won't face capital gains tax either, as gains only become taxable if they exceed the £3,000 capital gains tax allowance (2024/25).

If your platform allows a share class conversion (switching within the same fund), this won't trigger capital gains tax. However, if you need to sell one and buy the other, this counts as a sale, meaning capital gains tax may apply if your gains exceed the allowance.

The final verdict

If you want long-term growth, Acc units generally offer an advantage by reinvesting dividends, compounding returns over time. But that only works if the fund itself performs well, reinvesting into a dud won't magically boost returns. If you prefer regular cash payouts, Inc units let you take income as you go.

Tax-wise, there's no difference inside an ISA or SIPP, but outside, you may face dividend tax, income tax on interest, or capital gains tax when selling. Switching is possible, but check if your platform supports share class conversion to avoid triggering CGT.

Ultimately, the best choice depends on your investment goals, and crucially, the quality of the fund you're investing in.

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