A guide to Tax efficient Investing

If you are looking to build a long-term nest egg, either for yourself or your children, you will want to ensure that tax-efficient investing is high on your priority list. If you’re careful you will be able to mitigate the amount of tax you have to pay, saving more for the future. The two most practical options for those who want to make regular contributions into a low-risk investment vehicle are an Individual Savings Account (ISA) and/or a pension.

Individual Savings Account (ISA)

Every adult in the United Kingdom has a £20,000 ISA allowance for 2020/2021. This means you can invest up to £20,000 per tax year without paying a penny in Income Tax on the interest or dividends you receive, or Capital Gains Tax on gains made in a Stocks & Shares ISA.

There are four main types of ISA to choose from:

According to HMRC statistics, 76 per cent of all adult ISAs subscribed in tax year 2018-2019 were Cash ISAs, making them the overwhelmingly popular choice for savers in the United Kingdom. In essence, a Cash ISA is tax-free savings account. Traditionally, if you invested in a standard savings account, interest earned on your savings would be taxed (20% for basic-rate taxpayers and 40% for higher-rate taxpayers), making the tax-free Cash ISA a sensible alternative. But, since the introduction of the Personal Savings Allowance (PSA), in 2016, the majority of UK adults no longer pay tax on interest earned on their savings. The PSA is £1,000 per year for basic-rate taxpayers and £500 per year for higher rate taxpayers. Therefore, the reason to choose a Cash ISA over a standard savings account is if it offers a higher interest rate, you are a basic-rate taxpayer or higher-rate taxpayer who has used up their PSA or you are a top-rate taxpayer, who would be charged 45% tax on all interest earned from savings in a standard savings account.


In order to encourage people to invest in private pension schemes, the government offers tax relief, making a pension a highly tax-efficient investment vehicle.

Tax relief is calculated based on your highest rate of income tax: for a basic-rate taxpayer, tax relief is 20%; for a higher-rate taxpayer, tax relief is 40%; and for an additional-rate taxpayer, tax relief is 45%. For example, it would cost £80 for a basic-rate taxpayer to contribute £100 into their pension.

Your pension fund will also grow tax free. 

Premium bonds

If you’re looking for an investment vehicle that is both fun and tax-efficient, you might consider investing in Premium Bonds. Issued by the government backed National Savings and Investment (NS&I), you will be entered into a monthly prize draw with the chance to win between £25 and £1 million tax free. 

Higher Risk Investment

If you are willing to consider higher-risk investments – perhaps if you have used up your ISA allowance and are already making private pension contributions – you might consider investing into a venture capital scheme.

In order to encourage people to invest in companies and social enterprises that aren’t listed on a recognised stock exchange, the government offers significant Income Tax and Capital Gains Tax relief to investors who invest into the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) or a social enterprise.

This short guide should be enough to get you started on the road to successful equity investing. Please fill out your details below to download a free PDF version or contact us at [email protected]

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