A guide to the most tax-efficient investments & savings
Whether you’re looking to start saving or have savings already, you’ll probably want to avoid your hard-earned gains falling into the hands of the taxman. Today’s article covers four proven and fully legal tax-efficient ways to save and invest your money in the UK.
Related reading
What will you learn from this article?
- How pensions provide tax relief and long-term savings
- The benefits of tax-free growth through ISAs
- How to invest in startups through Venture Capital Trusts
- The perks of using a Lifetime ISA for home or retirement savings
- Tips to protect your savings from unnecessary taxes
What are some of the best tax-efficient ways to invest money in the UK?
Let’s face it, people like reducing taxes where possible.
If that rings true for you, let’s get started with today’s article on the best tax-efficient ways to save and invest money in the UK.
In this article, we cover the below list of investments initially as a summary, and later in more detail.
- Pensions. Tax-efficient investing for your retirement
- ISAs. Tax free savings accounts for adults and children
- Venture Capital Trusts: Higher risk investments in startups
- The Lifetime ISA: Often used for saving to buy property
So, there’s a quick summary of the best tax-efficient investments and savings options in the UK.
Now, let’s cover the detail.
What are the best tax-efficient investments and savings options in the UK?
Before continuing, we need to be clear. This article doesn’t constitute financial advice.
This article is here to offer some general insight into to the different options available.
Now, let’s take a look at some of the different options for those interested in tax-efficient investing.
The first on the list is pensions.
1. Pensions: The ‘I’m going to be really old one day’ account
Pensions don’t sound like much fun but hear me out. As a means of saving, they are almost unbeatable. You get tax relief on contributions, which means a £10,000 contribution to a pension turns into £12,500 immediately.
If you’re a higher-rate taxpayer, you could claim even more in tax relief!
Too good to be true?
Well, no. This is the government’s way of encouraging people to save for retirement, essentially making them less of a burden on the state in old age.
At retirement, you can withdraw 25% of your pension pot as a tax-free lump sum. The remainder would be subject to income tax.
Overall, pensions are a solid tax-efficient investment and are perfect for long-term retirement planning. That said, many find the topic of pensions and retirement complicated.
We are often asked questions on this topic including, how much should I pay into my pension, or even should I invest in a pension or an ISA?
By reading some of the above articles, you’ll certainly get to grips with this topic.
Now, let’s develop your understanding of ISAs.
2. ISAs: Your tax-free treasure chest
Think of ISAs (Individual Savings Accounts) as your financial Fort Knox. You could stash away up to £20,000 each tax year without handing over a penny to the taxman.
That sounds pretty reasonable, doesn’t it?
We think so.
It’s like having a secret vault in your basement, except instead of gold bars, you could have cash, as in an interest-bearing savings account, or a portfolio of stocks and shares.
You could also get your children in on the act by setting them up with a Junior ISA. The current limit is £9,000 per year and the money is locked away until they turn eighteen.
Beware though. The Junior ISA becomes theirs once they turn 18 so they could blow the lot on a holiday in Ibiza if they wished!
Looking for a tax-efficient savings and investment plan, ISAs are a fantastic choice.
External resource: An overview of ISAs (Gov.uk)
3. Venture Capital Trusts (VCTs): Tax-efficient investing in startups
For the experienced high-net-worth investor who may have maxed out on pension and ISA contributions, VCTs allow you to invest in small, fledgling businesses.
For higher earners, these are some of the most tax-efficient investments.
As an incentive for doing so, you’ll receive up to 30% tax relief on your investment. If you held onto those shares for five years, any profit you made would be tax-free.
Variations on this theme include Enterprise Investment Schemes.
Small fledgling businesses have great growth potential but also come with a great deal of risk, so make sure you understand and are prepared to take that risk before taking the plunge.
However, VCTs are not suitable for everyone. As a result, we always recommend talking to a financial adviser before deciding to invest.
4. Lifetime ISA: Saving for your future (and your children)
The Lifetime ISA (LISA) is for those aged 18 to 39 who want to save for a first home or retirement.
The maximum investment is £4,000 a year and the government will top up your contributions by 25%, up to £1,000 a year.
Just remember, it’s not all sunshine and rainbows, there are withdrawal penalties if you take out money for anything other than a house or retirement.
So, keep your eye on the prize!
The best tax-efficient UK investments and savings – conclusion
Saving and investing money in a tax-efficient manner in the UK doesn’t have to be a dry topic best left to accountants and tax advisers.
With these four tax-efficient investment and savings strategies, you could grow and build your net worth and keep more of your hard-earned cash.
The taxman may be lurking, but with a bit of wit, wisdom and advice, you could keep him at bay while you build your financial empire!
Factors to consider
Before implementing the strategies discussed, consider these factors:
- Your current financial goals and future needs
- The level of risk you’re comfortable with
- Tax implications and potential penalties for early withdrawals
- Whether seeking advice from a financial adviser is appropriate
- Your ability to stay committed to long-term investment strategies
By evaluating these points, you will make more informed decisions about saving and investing.
Article FAQs
Keen to learn more about the most tax-efficient ways to invest your money? Have a read this selection of questions and answers on this topic.
Remind me, what are the most tax-efficient ways to invest your money in the UK?
For everyday people, pensions and ISAs are the most tax-efficient options. For example, a pension contribution offers tax relief of up to 45%, while ISAs allow up to £20,000 in annual contributions to grow tax-free. Combining both can boost your savings and limit taxes. Furthermore, VCTs and EIS schemes are tax-efficient investments for high-net-worth individuals. As mentioned earlier in this article, they are riskier investments and getting the advice of a financial adviser is highly recommended.
How do I make the most of these tax-efficient investment options?
To make the most of these tax-efficient investments, make sure you use all your annual ISA and pension allowances. For example, contributing to a pension reduces your taxable income as you will benefit from government tax relief. As mentioned a couple of times, VCTs can also offer significant tax advantages for high-net-worth investors. They are often an option, once you have exhausted your ISA and pension allowances.
What are the benefits of using an ISA for savings?
ISAs offer multiple benefits, making them an excellent tax-efficient investment option. Any returns, whether from interest, dividends, or capital gains, are entirely tax-free. You can choose from various types, such as Cash ISAs or Stocks and Shares ISAs, providing flexibility based on your investment and wealth goals. Additionally, ISAs allow you to withdraw funds at any time without penalties. Therefore, this makes them an attractive and flexible option for medium-to-long-term savings.
What investment risks are involved with VCTs?
VCTs involve higher risk as they invest in smaller, or companies with a growth potential, which may be more volatile. However, they offer up to 30% tax relief on investments. For example, a £10,000 investment could provide £3,000 in tax relief if held for at least five years. While VCTs offer significant tax relief, they’re more suitable for experienced investors willing to accept the risks involved in exchange for potentially high rewards.
Can I combine several of these tax-efficient investment options together?
Yes, you can combine pensions, ISAs, and other investment schemes. This is a way to diversify and maximise tax efficiency. For instance, using both an ISA for short-to-medium-term savings and a pension for long-term retirement can provide a comprehensive approach to managing tax-efficient savings. Furthermore, as mentioned previously, if you have exhausted your pension and ISA allowances,
What other types of investments are good for building wealth?
Buy-to-let properties generate rental income and potential capital growth. Bonds provide steady returns with lower risk. Investment funds, like mutual funds or ETFs, offer diversification across multiple assets. Investing in shares allows for capital appreciation and dividends. Each option carries varying levels of risk, but a balanced portfolio combining these assets can support long-term wealth building.
How can I protect my wealth against taxes?
You can protect and preserve your wealth by using tax-efficient investment strategies, such as contributing to pensions and ISAs, which offer tax relief and tax-free growth. Diversifying into buy-to-let properties or bonds can provide additional tax advantages. Inheritance tax planning, using trusts or gifting, can also help minimise taxes. Consulting a financial adviser ensures your strategy is tailored to your specific needs, further safeguarding your wealth from unnecessary taxes.
