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What are the most tax efficient investments in the UK?

We’ll show you which products are the most tax efficient so you can make the most of your savings and investments, and minimise how much tax you pay.

ISAs

All of the capital gains, interest, and dividend income from ISAs are completely tax free.

You cannot contribute more than £20,000 to your ISAs, but you can split this allowance between multiple types of ISAs (cash, stocks, etc.) so you can diversify and reduce your risk.

Private pensions

Investing in a private pension gives you many tax advantages:

  • tax relief on the money you contribute to your pension
  • your pension pot can grow pretty much tax free
  • you can take some of your pension pot as a tax-free lump sum (25% after the age of 55).

Use this pension tax relief calculator to see how much tax relief you can get.

What pension scheme is your employer using?
Check with your employer if you’re not sure which one they’re using
Your annual income
£
Pension contributions
£
Select tax year
Pension contributions
£1,000
Automatic relief
£250
Pension contributions
£1,000
Automatic tax relief
£250
Your pension provider will automatically get this tax relief for you.
You don’t need to do anything.
Extra tax relief you can claim
£0

How your pension tax relief is calculated

HMRC will basically give you back the tax that you paid on the income that you used for your pension contribution.

In your case you earned £49,000 and contributed £1,000 to your pension.

Automatic Tax relief

You get £250

Your pension provider will automatically get this for you and add it to your pension pot.

Your pension pot will now be worth £1,250.

Children’s pensions

You can pay up to £2,880 each tax year into your child’s pension and HMRC will automatically add 25% to this as a tax relief.

When your child turns 18 they simply become the owner of the pension.

EIS startups

The Enterprise Investment Scheme is an incentive set up by UK government to encourage individuals to invest up in small businesses.

It offers quite a few tax reliefs to investors:

  • 30% income tax relief – for that investment amount, in the tax year that you invest
  • if you use any capital gains to invest in an EIS startup, you can defer the tax on it
  • zero capital gains tax when you exit the investment
  • 100% relief if the company you invested in goes bust
  • zero inheritance tax.

You can invest up to £1,000,000 per tax year.

SEIS startups

SEIS is almost identical to EIS, except for two things:

  • you get 50% income tax relief
  • you can only invest up to £100,000 per tax year.

VCTs

A Venture Capital Trust (VCT) is basically a special kind of investment fund:

  • its shares are traded on the stock market
  • it invests in turn in very small companies and startups.

VCTs can also help you save on tax:

  • 30% income tax relief
  • zero capital gains tax
  • zero dividend tax
  • you can only invest up to £200,000 per tax year in VCTs.

Unlike EIS/SEIS, if your VCT investments make a loss, you can’t use this to reduce your CGT bill from other investments.

Savings and peer-to-peer lending

The first £1,000 (or £500 if you’re a higher rate taxpayer) that you earn from interest from savings accounts or P2P lending platforms are tax-free.

Dividend-paying shares

If you want to invest in stocks but you’ve reached your ISA allowance, choosing shares of companies that you will hold on to for a long time and which will pay dividends yearly might be a better idea.

The first £2,000 you make from dividends is tax-free.

You can use this dividend tax calculator to see how much tax you need to pay on the rest.

How did you earn dividends?
Dividends earned
£
Other income
£
Your additional income affects the tax you pay on fividends (e.g salary)
Select tax year
Taxable dividends breakdown
Dividends after tax
£2,925
Tax
£75
Dividends after tax
£2,925

Your first £2,000 from dividends is tax-free

Dividend Tax
£75

£1,000 of your dividends will be taxed at 7.5%: £75

Either try calling HMRC on 0300 200 3300 so they can simply take this tax from your salary or pension, or include it in your Self Assessment tax return.

How your dividend tax is calculated

Tax on dividends is calculated pretty much the same way as tax on any other income.

The biggest difference is the tax rates – instead of the usual 20%, 40%, 45% (depending on your tax band), you’ll be taxed at 7.5%, 32.5%, and 38.1%.

The numbers look strange but the reason is simple: the company paying you those dividends already paid corporate tax, so in the end it should work out to a similar tax rate.

This is mostly relevant if you own your company and trying to decide what is the best way to pay yourself: dividends or salary. Keep in mind that for salary you also need to pay National Insurance.

In your case you earned £3,000 in dividends and £29,000 in other income (this can be salary, rent, etc.).

Income Tax

You don’t pay income tax on the first £12,500 that you make in other income (this excludes dividends).

You pay 20% on the first £16,500 after the personal allowance.

Dividend Tax

You don’t pay any dividend tax on the first £2,000 you make in dividends.

You pay 7.5% on the next £1,000

Call HMRC on 0300 200 3300 so they can change your tax code – you’ll pay the dividend tax through your salary or pension.

If you normally file a tax return, you can also pay dividend tax through it.

Other CGT exemptions to keep in mind

You don’t have to pay Capital Gains Tax on:

Also, if you make a loss when you sell an asset (also called a “capital loss“), you might be able to deduct this from other capital gains and reduce your CGT bill.

More guides & useful information

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