Tactics for tax-efficient investing
With recent tax changes and the likelihood of further adjustments ahead, it’s important to use tax-free allowances, —such as the ISA allowance, pension annual allowance, and capital gains tax exemption—and plan asset disposals carefully to minimise tax liabilities. Proactive planning and professional advice could help you retain more of your returns and build long-term wealth.
Investing is about more than just picking the right assets. It’s also about keeping more of what you earn. With several tax changes already in effect and further shifts likely over the coming years, now is a great time to revisit your financial plan and ensure it’s as tax-efficient as possible.
Why tax efficiency matters
Every pound saved in tax is a pound that can be reinvested to grow your wealth. Whether you're building a nest egg, saving for retirement, or planning to pass on wealth to the next generation, understanding how tax affects your investments is crucial.
With the UK facing ongoing fiscal pressures, the Institute for Fiscal Studies (IFS) has warned that further tax rises may be “hard to avoid” over the next five years. This makes it more important than ever to use available tax reliefs and plan ahead.
Make the most of tax-free allowances
The UK tax system offers several allowances that could help reduce your tax bill:
- Capital gains tax (CGT) allowance: The annual CGT exemption is now just £3,000. Generally, gains above this threshold are taxed at 24% for higher-rate taxpayers (up from 20%) and 18% for basic-rate taxpayers (up from 10%).
- Dividend allowance: Reduced from £1000 to £500 from April 2025, meaning more investors will pay tax on dividend income.
- Income tax personal allowance: Still at £12,570, but tapered down to £0 for income over £125,140, reducing/eliminating the benefit for higher earners.
These shrinking allowances mean more of your investment returns could be taxed unless you take proactive steps.
Consider using ISAs and pensions
For now, two of the most effective tools for tax-efficient investing remain:
- ISAs: You can invest up to £20,000 per year tax-free. All income and gains within an ISA are exempt from tax, and you don’t need to report them on your tax return. Stocks and Shares ISAs are ideal for long-term growth, while Cash ISAs may offer short-term security.
- Pensions (including Self Invested Personal Pensions): Contributions receive tax relief at your marginal rate, and investments grow tax-free. From 2028, the minimum access age rises to 57, so plan accordingly. When you retire, 25% of your pension pot can be withdrawn tax-free.
Spread gains and use both spouses’ allowances
If you're married or in a civil partnership, you can transfer assets without triggering a tax charge. This allows you to:
- Use both partners’ CGT and dividend allowances.
- Potentially reduce the overall tax rate on investment income
- Optimise ISA and pension contributions across both individuals
This approach can be especially powerful when one partner is in a lower tax band.
Plan the timing of disposals
With CGT rates rising and allowances shrinking, timing matters more than ever. If you’re planning to sell an asset, consider spreading disposals across tax years to make full use of your annual exemptions. You can also offset capital losses against gains to reduce your tax bill.
Keep an eye on future tax policy
The IFS has highlighted that all major political parties are likely to maintain the freeze on income tax thresholds until at least 2028. This “fiscal drag” means more people will be pulled into higher tax bands as wages rise, increasing the importance of tax planning.
Tax-efficient investing isn’t just about saving money; it’s about making your investments work harder. With the 2025 tax changes and the likelihood of further adjustments ahead, the stakes are higher, but so are the opportunities for those who plan ahead.
Whether you’re just starting out or a seasoned investor, working with a financial adviser could help you navigate the evolving landscape and build a personalised plan tailored to your goals. And remember, the earlier you act, the more options you may have. Tax efficiency is a journey, not a one-off task.
Important information
This article is for information purposes only. It is not intended as investment advice.
The value of investments and the income from them can fall as well as rise and you may not get back your initial investment.
The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits which isn't guaranteed and can do down as well as up. The benefits of your plan could fall below the amount(s) paid in.
Tax treatment depends on your individual circumstances and may be subject to change in the future. In this article we refer to the tax rate and thresholds set for England and Northern Ireland, these may differ in the devolved nations of Scotland and Wales.
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