How can I ensure that my portfolio is as tax efficient as possible?

financial advisers

It is important to consider spreading investments across various “tax wrappers” to gain the associated tax benefits.

When looking to invest for the longer term, in addition to the selection of the investments themselves, there are numerous options to consider in order to minimise the potential tax due on any income or gains. So rather than holding everything in the same way it is important to consider spreading investments across various “tax wrappers” to gain the associated tax benefits.


Individual Savings Accounts (ISAs)

For most people this is probably the best place to start. Each year it is possible to add £20,000 to an ISA and protect the money from tax. Investments held within an ISA are free of tax on interest, dividends and capital gains. Whilst the annual allowance isn’t huge, if used each year then over time this can grow into a sizable pot which is all tax-free, especially where couples are both using the allowance.

Some people could also benefit from using the £4,000 “lifetime ISA” allowance (which is part of the £20,000 maximum). Where funds are used to purchase a first home or not accessed until at least age 60, holders can benefit from a 25% bonus on their savings up to a maximum of £1,000 per year.


Pension Contributions

Where eligible, you can contribution up to £40,000 per annum to a pension and benefit from tax relief at your highest rate. For personal payments, this means each £1 invested will only actually costs you 80p for basic rate taxpayers.  60p for higher rate taxpayers and only 55p for additional rate taxpayers, making pensions a very tax efficient means of savings.

There are limits to what you can add and restrictions on when money can be withdrawn (not until at least age 55 for most). But once in the pension fund, similar to ISAs, investments will grow free of tax. When you do come to withdraw money, the first 25% will be tax-free and the balance is taxed as income in the year received. This is particularly beneficial to those who pay higher rate taxes now and will fall to a lower tax rate later in life.

Like with ISAs, couple’s should make sure they maximise both allowances . Even if you have no earnings (perhaps because you are retired already or a stay at home parent), you can still add up to £3,600 each year and benefit from 20% tax relief up to age 75.

Pension rules can be quite complicated however, so it is important to take professional advice to ensure you maximise the opportunity and don’t do anything you shouldn’t.


Direct Investments

By investing directly into assets, that is without the benefit of a tax wrapper such as the ISA or a pension, income and gains become taxable. However, there are various allowances which can still make this tax efficient, although these are being reduced in the new tax year.

You can currently benefit from £12,300 of “capital gains” each year and using this as part of portfolio management helps to reduce longer term tax. This is being reduced to £6,000 from April 2023 and then further to just £3,000 in April 2024, so those with gains should make use of the higher allowances while they can. If gains exceed the allowance, prior to sale assets can be transferred free of tax to a spouse so that you are able to benefit from double the allowance on the sale.

You can also benefit from the annual dividend allowance, where the first £2,000 of dividends each year are tax free. Again, this is being cut to £1,000 in April 2023 and then further to just £500 in April 2024.

Dividends are also taxed at lower rates than earned income or interest, currently 8.75% for basic rate taxpayers, 33.75% for higher rate and 39.35% for additional rate taxpayers.

As well as the dividend allowance there is also the personal savings allowance which enables basic rate taxpayers to earn £1,000 of interest each year without tax. This falls to £500 for higher rate taxpayers and unfortunately additional rate taxpayers do not benefit. This interest could come from cash deposits or interest on bonds held in investment portfolios.


Onshore/Offshore Bonds

These investment wrappers provided by insurance companies allow an unlimited amount of money to be invested and to benefit from the potentially favourable tax treatment.

Returns from both are taxed against income on disposal, with onshore bonds having an allowance for basic rate tax deducted along the way, but offshore bonds rolling up free of tax.

A full explanation is beyond the scope of this article. However, the use of this particular wrapper enables the management of a portfolio without having to give regard to the annual tax consequences and reporting required for “direct” investment as noted above.

This type of investment can also be assigned to a Trust or to others (such as children) making them a useful tool for both tax deferral and Estate planning.

In summary, by making use of annual ISA allowances, making pension contributions and making use of annual allowances. Such as for capital gains, dividends and interest, as well as considering Onshore/Offshore bonds in the right circumstances. Potentially large amounts of money can be invested with minimal annual tax consequence.

The interaction of these options and the rules surrounding then can be complex, but the benefits can be substantial, particularly over the longer term.

Understanding and advising on maximising these options is just one example of how an experienced wealth planner can help make your money go further, with benefits often far outweighing the cost of advice.

For more information please get in touch with us. 

by Lee Smythe, Kingswood Wealth Planner


The value of your investment can go down as well as up, and you can get back less than you originally invested. Past performance or any yields quoted should not be considered reliable indicators of future returns. Prevailing tax rates and relief are dependent on your individual circumstances and are subject to change. Whilst we do provide tax planning, we cannot provide tax advice and where you require tax advice we will refer you to a tax specialist.