Funds – income or accumulation units?

Once you’ve selected which investment fund you’d like to buy, you have the option to choose either the income or accumulation version of the fund – but what’s the difference and which should you choose?

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Tax rules can change and their effects on you will depend on your individual circumstances.

What you’ll learn:

  • The difference between income and accumulation units
  • What compounding can do for your investments
  • What you’ll need to consider when deciding which to choose.

An income unit will distribute any interest or dividend income from the fund directly to you. As a result, you may receive an income from your investment at regular intervals. An accumulation unit is designed to offer you growth in the fund, so any income will be reinvested, raising the value of your investment.

Which should you choose?

The decision whether to buy income or accumulation units will depend on your goals. Do you need the income now, or do you want to wait, giving your investment a chance to grow over the long term? Income units are often used by retirees to increase their pension payments, but if you don’t need the cash now, accumulation units offer the benefit of compounding.

What is compounding and why is it important?

Compounding is a process where an investor earns income on top of income. It’s the result of reinvesting income, rather than paying it out, so that in future, income is earned on both the initial capital invested and the income earned previously.

How compounding works – an example

Let’s imagine a fund that delivers growth of 4% a year and income of 3% a year. Two investors each invest £15,000, which they hold for 20 years, but one takes income and spends it and the other lets it accumulate.

How compounding works

Investor buys income units

Investor buys accumulation units

Years one to 19

3% income earned and withdrawn each year

3% income re-invested in the fund each year

Year 20

Fund value £32,867

Total income withdrawn over 20 years £13,400

Total value £46,267

Fund value


Other considerations

Changing unit type

If you’re already invested, you may want to think about changing from one type of unit to the other. For example, if you’re approaching retirement and want to move from accumulation units to income units to supplement your pension income. There may be charges involved, and the risks of market movement, when changing units, so check with your fund provider and the platform you’re using to buy or sell your fund.

If you’re holding the investment outside a stocks and shares ISA or cash ISA, remember that changing the type of units you hold amounts to selling one type to purchase the other. This sale may trigger a capital gain and if this exceeds your annual allowance then you may incur capital gains tax.


Buying the accumulation share class would mean that your income from the investment fund would remain in the fund and be reinvested with no charge. This wouldn’t automatically be the case if you chose to re-invest the income received from income units.

Relative performance between unit types

In the long term, even though the performance of the income and accumulation units may be similar, the effect of compounding will make a difference, because you’re reinvesting income instead of spending it. If the fund steadily appreciates, the profit on the reinvested income will mean the growth of the accumulation units will be greater than the total return from the income units – growth plus distributed income – though of course, you won’t have the income to spend.


When a fund is held in a tax-efficient account like an ISA or SIPP, there’s no income tax, capital gains tax (CGT) or dividend tax to worry about. However, outside these types of account, you need to be aware of the implications of your choice of units. Income that’s ‘rolled up’ into your accumulation units is known as a ‘notional distribution’ and is taxable in the same way as the distributions from income units.

Any dividends that are automatically reinvested can be used against your dividend income tax-free allowance, which is £500. That means that if total dividends received/reinvested is more than this amount, you may have tax to pay. For income-paying funds where the income is classed as interest, you wouldn’t pay tax up to the new £1,000 interest allowance for basic rate taxpayers. The allowance for higher rate taxpayers is only £500 and additional rate taxpayers have no allowance at all. Remember, this covers all interest that you receive on cash as well as investments, and once the interest you receive exceeds your allowance, it’s subject to income tax.

When you come to sell accumulation units, you’ll pay CGT on any increase in value that exceeds your annual CGT allowance – £3,000 for 2024-25. CGT will be payable on the value of the accumulation units when they’re sold, minus the original investment and any income that has been accumulated.

This means holders of accumulation units should keep a record of all the notional distributions described above, so they can adjust the calculation when they sell their holding, to work out the proportion of their sale proceeds that represents a capital gain.

Please bear in mind that tax rules can change in future and their effects on you will depend on your individual circumstances. Also, remember that whether you buy accumulation or distribution units, they, and any income from them, can fall in value and you may get back less than you invest.

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