Making the most of tax-efficient schemes

  • Simon Ross
  • 03 February 2023
  • 10 mins reading time

As an adviser, my first port of call with clients is often to ensure they have used their tax-efficient pension and Isa allowances. This is perhaps even more imperative today, when some tax allowances are being frozen and others are being reduced (1).

Pensions and ISAs are familiar to many people. Nonetheless, even apparently knowledgeable individuals can find they have not fully utilised these tax-efficient opportunities.

I had a recent case of a company director who thought he had maxed out his lifetime pension allowance. But a review of his documentation revealed that more than £500,000 of this allowance was still outstanding.

So, while you may think you’ve fully availed yourself of your relevant tax benefits, a financial planner could potentially unearth some you were not aware of.

Moreover, some tax allowances, such as the personal savings allowance and friendly society tax-exempt savings plans, are less well known. The same potentially goes for premium bonds, which offer a pool of tax-free cash prizes linked to prevailing interest rates. And some people are unaware of the £9,000 annual Junior ISA (JISA) tax-efficient allowance they could use for their children.

Stocks and shares ISAs

There are four types of ISAs: cash ISAs (savings accounts that pay interest free of income tax), lifetime ISAs, innovative finance ISAs, and stocks and shares ISAs. But there are only two types of JISAs: cash JISAs and stocks and shares JISAs. For simplicity’s sake I will focus just on the stocks and shares ISA, which is a wrapper in which savings and investments are free of income tax and capital gains tax.

Anyone aged 18 and above can save up to £20,000 in a tax year in a stocks and shares ISA. The ISA doesn’t expire when the tax year finishes, but remains open for as long as the ISA remains invested and a new allowance is available each tax year allowing more savings to be added in to an ISA wrapper. Some stocks and shares ISAs also allow you to reinvest any withdrawals from the ISA, so long as you do so in the same tax year.

A stocks and shares Isa can include:

  • investment funds and unit trusts

  • company shares

  • government bonds

  • corporate bonds.

A key benefit of current tax rules is that a deceased person’s ISAs can be transferred fully to the surviving spouse. Indeed, I know someone who will have more than £1 million in ISAs once his late wife’s ISAs are transferred to him.

Moreover, ISAs can hold AIM share portfolios. AIM is a London stock market for shares in small and medium-sized companies. Once an AIM portfolio is held for two years, it is effectively free of inheritance tax (technically, the portfolio value is subject to inheritance tax, but at a current rate of 0 per cent). This means these portfolios could be passed on to loved ones with no inheritance tax liability.

Pension facts

Turning now to pensions, you can contribute tax-efficiently to pensions during your lifetime as long as the value of your pensions does not exceed £1,073,100 (the lifetime allowance). Pension savings above this level are usually taxed, but the lifetime allowance may be higher if lifetime allowance protection is already in place. This protection reflects safeguards HMRC introduced in times when the lifetime allowance was higher.

You can normally invest up to £40,000 a year tax-efficiently into a pension (this includes any contributions from your employer). But contribution levels are connected to what you earn. So you can generally contribute the maximum annual amount only if your earnings exceed £40,000 a year. Non-earning individuals can also invest in a pension, but this is limited to an annual maximum of £3,600. However, pensions tax rules mean non-earners only need to contribute £2,880 and HMRC will then bring the total contributions to £3,600 by adding £720 of basic rate tax relief.

People who haven’t contributed the maximum amount to their pensions in the preceding three years can use something called ‘carry forward’. This lets you make pension contributions greater than the annual allowance up to the unused relief amount brought forward, yet still enjoy full tax relief. Note that this relief is based on your earnings in the current tax year.

The amount you can pay into a pension tax-efficiently could reduce if you earn more than £200,000 a year. See our article on Tapered pension allowance for high earners for more details.

As well as maximising ISAs and pensions, you could also consider maximising personal allowances, such as personal savings allowances.

Other tax-efficient opportunities

The personal savings allowance lets you earn interest tax-free on your savings, with the annual tax-free limit dependent on your income tax rate, as follows:

Additional rate (45 per cent) taxpayers are not given a personal savings allowance.

You might also look at holding premium bonds. In January 2023, the annual prize rate was 3.0 per cent and prizes are tax-free (2). But the odds of winning a premium bond prize are just 24,000 to one (for every £1 bond). So you would need to hold a significant amount of them to have a good chance of reaching the annual prize rate. You can hold up to £50,000 in premium bonds.

In addition, you can pay up to £25 a month, or £270 a year, into a tax-exempt savings plan with a friendly society over a term of 10 to 25 years. A friendly society, like a building society, is a mutual association owned by its members. The saving plan is a kind of fund that invests the pooled money from its members into various assets, which can include shares, bonds, property and cash. But in order to qualify for the tax-free status, the policy must be held for the full term or until the death of the policy holder (3). And early surrender could mean you get back less than you invested and that you could potentially be liable for tax on any investment gains (4).

Once you have made full use of mainstream tax allowances (or even decided not to make full use of them), then you can consider other investments such as offshore and onshore bonds, Enterprise Investment Schemes (EISs), Venture Capital Trusts (VCTs), and investments qualifying for inheritance tax business property relief, if suitable. These can be tax-efficient in some circumstances.

Finally, couples can try to maximise their combined allowances by taking advantage of any differences in their individual tax bands when setting up investments. But, as is the case with financial planning in general, this can be complex and you may want to seek the advice of a good financial adviser.


(1), ‘The Autumn Statement 2022 speech’, 17 November 2022.

(2), ‘Premium Bonds’, 18 January 2023.

(3), ‘IPTM8420 - Friendly society tax exempt policies: qualifying policy rules: minimum capital sums payable’, 11 January 2023.

(4) Sheffield Mutual, ‘Tax exempt savings plan with life assurance’, May 2020.

Important information

There are no hidden fees or charges at Schroders Personal Wealth, and you’ll only pay if you choose to go ahead with the recommendations in your personalised financial plan.

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 go down as well as up. The benefits of your plan could fall below the amount(s) paid in.

The value of investments and pensions and the income from them can fall as well as rise and are not guaranteed. The investor might not get back their initial investment.

There is no guarantee by investing money it will keep level or beat inflation, particularly when inflation is high.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

Cash savings and investments are protected to the value of £85,000 per person per institution by the Financial Services Compensation Scheme (FSCS). However the value of investments may fall as well as rise.

Any views expressed are our in-house views as at the time of publishing.

This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or part) without our prior written consent.

In preparing this article we have used third party sources that we believe to be true and accurate as at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the content in relation to specific situations and particular circumstances.

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