Tax efficient investing: making your money work harder

Each year an individual’s tax efficient allowances are re-set; this happens on 6th April.  For the average UK adult this will mean in the 2019/20 tax year they can invest £20,000 into an ISA and £40,000 into a pension (subject to certain rules).

Due to the tax efficient status of these products it is important they are maximised, where possible, to help meet an individual’s long term needs.  The growth within both an ISA and Pension is tax free; this status is not available in the majority of other investment products.  This means that, even if you were investing in the same funds, the ones held in the pension or ISA will grow at a higher rate than the ones held in, say, a General Investments Account or Investment Bond.

ISA contributions come from net pay but withdrawals are paid out completely tax free.  Pension contributions are tax efficient for both an individual (tax relief) and employers (paid out before tax/no National Insurance Contributions).  The proceeds, generally, pay out 25% of the fund tax free, whilst the remainder is subject to income tax, but can be manipulated to ensure tax efficiency for the owner sure tax efficiency for the owner.

ISAIndividual only, from net payTax free growthTax free
Pension Individual or Employer Tax relief available
Tax free growth
Generally: 25% tax free, balance subject to income tax

In focus

The ISA annual allowance cannot be “rolled over” to future tax years; therefore you either use it or lose it.  Contributions can be paid regularly or in lump sums and can be split (subject to the rules and ensuring the total amount invested in the tax year is a maximum of £20,000) between the various ISA types currently on offer, i.e. Cash, Stocks & Shares, Innovative Finance, Help to Buy and Lifetime ISAs.  Each ISA has a slightly different purpose, so ensure you are saving to the correct type to match your needs.

A Stocks & Shares ISA can hold many different types of assets – from pooled investment funds to individual shares, making it a diverse vehicle and, potentially, particularly attractive for those who have accumulated wealth and want to move income producing assets into a tax free environment.  The funds growth and capital gains are also tax free.

The fund within a pension is treated in the same way as an ISA. The key difference is that, subject to earnings, £40,000 can be paid “gross” (i.e. after tax relief from an individual or before certain taxes from an Employer) per annum.  If certain criteria are met, up to three years of missed allowance contributions can also be made into a pension – making it a very attractive, tax efficient vehicle.

Broadly speaking pensions are split between two types – Final Salary and Money Purchase.  The former is an employer scheme run by trustees who take responsibility for calculating benefits and the investment strategy; whereas the latter’s benefits are based on the accumulated fund and the investment strategy is chosen by the pension owner.

What about the children?

Under 18s also have an annual allowance for ISAs and Pensions – these are £4,368 and £3,600 gross (i.e. £2,880 before tax relief) respectively.  One exception is for junior cash ISAs for individuals aged 16-18 when contributions of up to £20,000 are allowed.  A Junior ISA/Pension must be opened by a parent, but anyone can contribute.

The earlier their savings start, the larger the compounding effect on investing will be – presenting the opportunity to pass on inheritances efficiently and giving their long term investment needs an early boost.


Hopefully the above goes some way to explaining why an individual should use their tax advantaged annual allowances where possible.  The government doesn’t give much away, so making the most of tax relief, tax free growth and tax advantaged withdrawals is essential.

Also essential is having the correct advice on how best to use these allowances to suit your circumstances, as well as structuring the holdings to suit your investment profile.

Should you wish to discuss pensions, investments or any other financial planning matter, please let us know.