Six ways to pay less tax on your investments

There are plenty of strategies that investors can follow to build a portfolio that is well-balanced and holds potential to grow their wealth.

Minimising tax bills is an important approach in your quest to doing so. That’s because the less you pay in tax, the more money you get to keep – and put to work.

The sooner you use tax breaks, the sooner your investments are protected from unnecessary tax bills.

With the new Labour government due to deliver a Budget on 30th October there is speculation about tax bills rising in the future – particularly for higher earners.

Here are six ways to ensure you don’t have to pay more tax than you need to on your investments:

1. ISA contributions

One of the easiest ways to reduce your tax bill is to shelter returns from income and/or capital gain tax that are above your allowances in an Individual Savings Account (ISA). For the 2024-25 tax-year you can generally put up to £20,000 into an ISA.

You won't be taxed on any returns from savings or investments if they are held in an ISA, nor will you have to pay Capital Gains Tax (CGT) on any of the profits you make.

That's worth knowing because if your investments aren't held in a tax-efficient wrapper, you'd be taxed on profits above the annual exemption for CGT of currently, £3,000 when it comes to disposing your investments.

Dividends are also tax-free inside an ISA. If you hold shares outside an ISA there’s a way of getting them inside this valuable tax shelter. With any unused ISA allowance, you can action a 'Bed and ISA' . That is when you sell investments that you're holding outside an ISA, then buy the same investments back within your ISA, which means you can enjoy tax-free dividends. Please note, there may be tax implications when selling investments held outside of an ISA.

Interest earned is also paid tax-free within an ISA.

Contribute to your ISA now

2. Pension contributions

One of the most appealing aspects of pension saving is the boost your contributions receive from tax relief.

All taxpayers currently get 20% paid by HM Revenue & Customs (HMRC) to the private pension pot they are funding. And if you pay income tax at a higher or additional rate, you can potentially claim further relief from HMRC on your self-assessment tax return for the relevant tax year, linked to your pension contributions. However, if you make contributions via salary sacrifice or net pay arrangements through your employer you may not need to claim additional tax relief.

Any income or gains from the fund invested within a pension are also free of CGT and income tax – while it remains inside the pension.

You can usually contribute up to £60,000 per tax year in a pension (this limit covers both personal/employee and employer pension contributions), provided that you haven’t withdrawn a taxable income from any other defined contribution pensions. Although tax relief is limited to your relevant UK earnings.

Non-earners have an annual limit of £3,600 gross. That means that they can add up to £2,880 and the government will add up to £720 in tax relief – which adds up to £3,600.

By topping up your pension, not only do you boost your retirement savings, you reduce the amount of tax you pay by reducing the amount of income exposed to higher or additional rate income tax.

However, if your earnings exceed £200,000 and your adjusted income is greater than £260,000, your annual allowance will be reduced. For every £2 that your adjusted income goes over £260,000, your annual allowance for the current tax year reduces by £1. The minimum tapered annual allowance you can have in the current tax year is £10,000. These rules are complicated therefore we would recommend you seek personal tax advice to ensure your annual allowance is calculated correctly. If your contributions exceed the annual allowance, you would face a tax charge at your marginal rate of tax.

On top of your normal pension annual allowance, you can carry forward any unused pension allowance from the previous three tax years (provided you were a member of a registered UK pension scheme during those years) – one of the rare allowances that isn’t lost each tax year.

We offer a tax-efficient way to save with our Self-Invested Personal Pension (SIPP).

3. Plan ahead on making capital gains

It’s worth doing some forward planning when it comes to cashing in any investments. On those held outside an ISA or pension, you’ll pay CGT on profits over the capital gains allowance of currently £3,000 per person, per tax year (however, it is not available to non-UK domiciled individuals claiming the remittance basis). You could save on your tax bill by factoring in the timing of disposing of those investments. For example, you might think about staggering the sale of some investments over two stages, over two different tax years to minimise your CGT liability.

4. Tax-efficient gilts

Gilts – otherwise known as UK government bonds – often form part of a portfolio as a diversifier from shares. In simplistic terms, government bonds are IOUs issued by a national government. In exchange for your cash, you can earn a regular fixed rate of interest, which is sometimes referred to as a coupon. And when the bond has reached the end of its lifespan, also known as when it ‘matures’ you can get your money back (unless the government defaults).

If you’ve maxed out your £20,000 ISA allowance for the tax year, then gilts have a tax-efficient feature all of their own. While the income from UK government bonds is liable for income tax, any profit made from a gilt when you sell or when it matures it is completely free from CGT.

5. Use spousal allowances

Gifts between spouses and civil partners are free of CGT, so it’s possible to save on CGT by gifting shares between you and utilising both CGT allowances each tax year. The gift between spouses and civil partners is at “no gain no loss”. This means they will inherit the base cost of the shares, but the gain arising on the subsequent sale of those shares would trigger CGT. As a couple your current CGT allowance for 2024-25 is £6,000.

6. Tax-free interest for savers

Savers can also receive interest on cash savings with no tax liability, depending on their earnings. Your Personal Savings Allowance (PSA) depends on which income tax band you fall into. Basic rate taxpayers are entitled to a £1,000 allowance for interest received from savings, while higher rate taxpayers are entitled to £500 allowance. Additional rate taxpayers are not eligible for a PSA. If you hold savings jointly with your spouse or partner, you can both use your allowances. If you earn more in interest than your PSA, you’ll need to make sure you pay the tax that’s due to HMRC