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.

Children’s pensions

You can pay up to £3,600 each tax year into your child’s pension and HMRC will automatically add 25% to this as 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 the UK government to encourage individuals to invest 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
• 0% Capital Gains Tax when you exit the investment
• 100% relief if the company you invested in goes bust
• 0% 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
• 0% Capital Gains Tax
• 0% Dividend Tax
• You can only invest up to £200,000 per tax year in VCTs

Unlike EIS/SEIS, if your VCT investment makes 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 £500 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.

Other CGT exemptions to keep in mind

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

• Investments held in an ISA (see above)
• UK government bonds (also called ‘gilts’) and most corporate bonds
• Profits from selling small assets worth less than £3,000
• Any profit you make when you sell your main home (most of the time)
• Capital gains under £3,000.

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.