With the recent UK general election stirring discussions about potential tax changes, this is a good time to check your savings and investments are arranged as tax efficiently as possible.

Full details on any policy changes have yet to be announced and tax rules may change in the future. However, there are some simple ways to ensure you’re not paying more tax on your investments than necessary.

1. Make the most of your ISA allowance

One of the simplest ways to shield your investments from tax is to make the most of your individual savings account (ISA) allowance. You can invest up to £20,000 in ISAs in the 2024-25 tax year. 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 investments.

We’re only a few months into the new tax year (it started on 6 April) but as this article shows, the earlier you invest, the better. Why not consider increasing how much you’re investing each month or adding any lump sums to your ISA? It could make a big difference to the size of your pot over the long term.

2. Increase your pension contributions

If you’re able to lock away your money until age 55 (or 57 from April 2028), saving more money in pensions offers significant tax benefits. 

When you make a personal pension contribution, you get tax relief from the government. For every £80 you contribute, you 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. Most people can get tax relief on contributions of up 100% of gross relevant earnings, capped at £60,0002.

Your investments are also sheltered from CGT within a pension, enabling them to grow tax-free over the long term.

3. Manage capital gains tax on non-ISA investments

If you can’t make more use of your ISA or pension allowances, it’s still possible to manage CGT on investments you hold outside these tax wrappers. In the 2024-25 tax year, you can realise up to £3,000 of profits on your investments without incurring a CGT bill. You can’t carry forward any part of your CGT allowance into subsequent tax years. So, it may make sense to make full use of the current £3,000 allowance while you still can. 

4. Keep an eye on your personal savings allowance

The personal savings allowance is the amount of interest you can earn on savings each year without paying tax. Currently, it’s set at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. It’s £0 for additional-rate taxpayers. 

When interest rates were low, you’d need a fairly sizeable amount of money in savings accounts in order to exceed the allowance. But in the current environment of high interest rates, you might want to check whether you’re at risk of exceeding the limit and consider other ways to save and invest your money. 

Holding some money in cash savings is important because it can help you cover unexpected emergencies without having to resort to short-term, high-cost debt (such as using a credit card with high fees or entering an unplanned overdraft). For one-off expenses, one rule of thumb is to keep the greater of £2,000 or half a month’s expenses in a bank account. When it comes to an income shock, we generally suggest keeping back 3-6 months’ expenses in an accessible account. 

For savings over and above your emergency fund, you might want to consider investing the excess in your stocks and shares ISA. Shares have historically offered higher returns than cash over the long term, albeit with greater volatility (or swings in prices). Although investments go down as well as up and you may get back less than you invested, history shows that patient investors tend to be rewarded for this extra risk.

5. Use your spouse’s allowances

If you’re married or in a civil partnership, it can be more tax efficient to organise your finances as a couple than go it alone. This is because you can take advantage of each other’s tax allowances. As a couple, you essentially have two ISA allowances, two pension annual allowances, two CGT allowances and two personal savings allowances. 

Spouses and civil partners can transfer assets to one another without paying tax. This might come in handy if one partner is a higher-rate taxpayer and the other is a basic-rate taxpayer. By transferring certain assets into the basic-rate taxpayer’s name, you could benefit from a lower rate of tax on income and capital gains. 

Tax is complicated, so we’d suggest speaking to a financial adviser if you’re unsure what’s right for you. However, it’s always worth remembering that the less tax you pay on your investments, the more money you’ll be able to put towards your future.

 

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

2 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. Your annual allowance might be lower than £60,000 if you have a high income or you’ve already flexibly accessed your pension pot. 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.

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

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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This article is designed for use by, and is directed only at persons resident in the UK.

The information contained herein is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information does not constitute legal, tax, or investment advice. You must not, therefore, rely on it when making any investment decisions.

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