Not everyone is able to stump up £20,000 a year to invest in an individual savings account (ISA). Even fewer can save up to £60,000 in pensions each year. But there may be other ways to maximise your ISA and pension allowances and improve the tax efficiency of your investments.

One such way is through ‘bed and ISA’ or ‘bed and pension’. This is where you top up your ISA or pension with the proceeds from the sale of your existing investments, rather than with new money.

Over time, it could help to reduce your tax bill and make a significant difference to your overall returns. It could be particularly valuable this year because the tax-free allowances for those who invest outside ISAs and pensions are becoming less generous.

Read on to find out how the process works, why it could make sense this tax year and the potential drawbacks to be aware of.

What is bed and ISA?

Bed and ISA is an unusual phrase, but it’s a legitimate way of shielding your investments from tax.

When you invest through an ISA, your money can grow free from the income tax you might pay on the dividends1 or interest you receive, as well as the capital gains tax (CGT) that could be applied on any profits (‘gains’) you make when selling assets.

With a general account, however, you could end up paying tax on dividends, interest and profits. Moving your investments into an ISA is a straightforward way of reducing or even eliminating these potential tax liabilities.

It isn’t possible to transfer investments directly from a general account to an ISA, and that’s where bed and ISA comes in. Bed and ISA is a two-step process which involves selling holdings in your general account and then buying back the same holdings within your ISA. You effectively end up with the same portfolio as before, but your investments are housed in a more tax-efficient account.

You can find out how to carry out a bed and ISA transaction with Vanguard here.

Why could it make sense this tax year?

Bed and ISA is especially important in the 2023-24 tax year because the tax-free allowances for those who invest outside an ISA are becoming less generous.

The amount of tax-free profits you can make will be halved from £6,000 to £3,000 for the 2024-25 tax year. Profits over and above this level will be taxed at 10% or 20%2, depending on your other income. Meanwhile, the amount of tax-free dividends you can earn will reduce from £1,000 to £500. How much tax you pay on dividends that exceed this allowance depends on your income tax band3.

The changes mean it makes even more sense to shelter your investments from tax through an ISA.

Is bed and ISA worth it?

If you aren’t going to max out your ISA allowance using new money, bed and ISA could be well worth considering.

When you initially sell holdings in your general account, you’ll be liable to pay tax on profits that exceed your CGT allowance. However, once your investments are inside an ISA wrapper, you won’t have to pay tax on any future profits, interest or dividends. This could make a big difference to your long-term returns.

To help illustrate this, we calculated the potential increase in returns that a higher-rate taxpayer could realise by using bed and ISA every year. In our hypothetical example, the investor starts off with both a general account and an ISA, valued at £100,000 each. They invest in a portfolio which returns 5% a year after costs and then sell the investments after 10 years, paying CGT due on the remaining general account balance.

The chart below shows the difference it would make if they depleted their general account over five years (by moving £20,000 a year into their ISA) compared with doing nothing. By diligently making the most of bed and ISA, the individual ends up with £14,463 more.

How bed and ISA can increase returns

Return on a £200,000 original investment over 10 years – using bed and ISA vs doing nothing

Source: Vanguard calculations. Notes: Based on an initial portfolio of £200,000, of which £100,000 is in a general account (including £25,000 of unrealised capital gains) and £100,000 in an ISA. The returns used are hypothetical and are not guaranteed. The returns are based on a 75% shares allocation and 25% bond allocation, with shares returning 5.5% (1.5% dividend yield and 4% capital growth) and bonds returning 3.5% (3% interest and 0.5% capital growth). Assumes a higher-rate taxpayer with a personal savings allowance of £500, a dividend allowance of £1,000 in 2023-24 (£500 thereafter), and a capital gains tax allowance of £6,000 in 2023-24 (£3,000 thereafter). Dividends and interest after tax are assumed to be reinvested and the investments are sold at the end of the final year.

Are there any potential drawbacks to be aware of?

Bed and ISA counts towards your ISA allowance, so you need to make sure the transactions – plus any contributions you’ve made with new money – don’t exceed the current £20,000 annual limit.

As mentioned before, selling investments in a general account could trigger CGT. Over time, this will hopefully be outweighed by the impact of future tax-free growth, but that isn’t guaranteed. Remember, the value of investments can fall as well as rise and you could get back less than you invest.

When you sell and re-buy investments, you’ll also be out of the market for a period of time. During that time, the price of the investments might change, so you could end up with fewer units or shares in your ISA than you originally held.

The rules around bed and ISA can be complicated, so consider speaking to a financial adviser first.

Selling funds in your general account and then transferring the proceeds to your ISA can take time. So, if you’re planning to use the current tax year’s ISA allowance, it’s best to leave plenty of time rather than waiting until 5 April.

Can I move my investments to a pension instead?

It’s also possible to move existing investments to a pension through a similar process known as ‘bed and pension’. With Vanguard, you sell holdings in your general account, transfer the proceeds to your bank account, and then use the cash to make a pension contribution. This means the process will take a little longer than with bed and ISA. And you need to make sure you have a verified bank account linked your Vanguard account for us to make the payment.

Moving investments into a pension not only means future growth will be tax free, but you’ll also get 20% tax relief on the pension contribution. So if you contribute £80, you’ll get a top-up of £20. If you’re a higher-rate or additional-rate taxpayer, you can claim back an additional £20 or £25, respectively, via your self-assessment tax return.

The main thing to bear in mind with bed and pension is that you can’t access money inside a pension until at least age 554. You need to be sure you won’t need the money before then.

There are also limits on the amount you can contribute to pensions each year and still get tax relief. In general, this is the lower of £60,000 or your gross relevant earnings5 (including tax relief). For those with higher incomes, the £60,000 may be reduced6. Those without earned income can still contribute £3,600 per year (including tax relief).

Bed and pension transactions will count towards your pension annual allowance, so it’s important to check how much you’ve already contributed to pensions this year before going ahead. If you’re not sure, speak to a financial adviser.


1 Dividends are the payments some companies make to their shareholders out of their profits.

2 Surplus capital gains on residential property are also taxable, but at a different rate. In most cases, your family home is CGT-exempt. However, profits made on second homes or property investments can incur a CGT charge. See the HMRC website for more information.

3 See the HMRC website for dividend tax rates.

4 The minimum age at which you can access your pension will rise to 57 from April 2028.

5 For more on what counts as ‘relevant earnings’ that can earn tax relief when used to fund a pension, see the HMRC Pensions Tax Manual.

6 To work out if you have a reduced (tapered) annual allowance, see HMRC’s website.

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Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Eligibility to invest in a Vanguard Personal Pension depends on your individual circumstances. Please be aware that pension and tax rules may change in the future and the value of investments can go down as well as up, so you might get back less than you invested. You cannot usually access your pension savings or make any withdrawals until the age of 55.

If you are not sure of the suitability or appropriateness of any investment, product or service you should consult an authorised financial adviser. Please note this may incur a charge.

Your pension transfer will be sent to us as cash. During this period you will be out of the market (not invested) so you could miss out on any increase in the value of your pension fund should the market rise.

The eligibility to invest in either ISA or Junior ISA depends on individual circumstances and all tax rules may change in future.

You will be out of the market while your investments are being transferred so you could miss out on any increase in the value of your investments should markets rise. Should markets fall the value of your investment will remain the same.

Any tax reliefs referred to are those available under current legislation, which may change, and their availability and value will depend on your individual circumstances. If you have questions relating to your specific tax situation, please contact your tax adviser.

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Vanguard Asset Management Limited only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described, please contact your financial adviser.

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