Tax efficient investing for wealth preservation

In order to do that effectively, conscious wealth preservation strategies need to be put in place as soon as possible to potentially shield every pound that could be lost to avoidable tax costs.

A good place to start is taking full advantage of your tax allowances. For most people, that comes down to using ISAs and pensions, which are two of the most common and tax‑efficient ways to build savings.

Individual savings accounts (ISAs) shelter savings and investments from various taxes. Depending on your goals, you can choose a Cash ISA, which allows your savings to grow free from income tax, or a Stocks and Shares ISA, which gives you the opportunity to invest for potentially higher long-term returns. You can currently contribute up to £20,000 each tax year across your ISA allowances.

Any interest earned on cash, as well as any income or growth from investments held within an ISA, is generally free from UK income tax and capital gains tax (CGT). 

While tax benefits will depend on your individual circumstances, ISAs are often a useful way to make the most of your annual allowance. A Cash ISA may appeal if you're saving for shorter-term goals or prefer a lower level of risk, while a Stocks and Shares ISA can be suitable for longer-term objectives where you're comfortable with investments rising and falling in value. HMRC data suggests investors benefited from £5.6bn in tax relief from Stocks and Shares ISAs in the 2023/24 tax year.

It's worth being aware of planned changes to ISA rules. From 6 April 2027, the government intends to reduce the annual Cash ISA subscription limit for those under age 65 from £20,000 to £12,000, while retaining the overall ISA allowance at £20,000. This means those wishing to make full use of their ISA allowance may need to consider a combination of Cash and Stocks and Shares ISAs, depending on their objectives, timescales and attitude to investment risk. For those aged 65 or over, the Cash ISA limit is expected to remain at £20,000.

Pensions could offer among the most generous tax perks. These include: 

• Income tax relief on contributions: Contributions to registered pension schemes can benefit from tax relief, although the way this is applied varies. In many schemes, basic-rate tax relief is added automatically, giving a 25% uplift on net contributions. Higher- and additional-rate taxpayers may be able to claim further relief. Tax rules and benefits depend on individual circumstances and may change in the future.
• There is no CGT levied on investments that are transacted within a pension
• Dividends received within a pension wrapper are not subject to dividend tax 

When utilised effectively, pensions could save you substantial amounts in tax. For the 2025/26 tax year alone, investors are expected to save £33bn with their pension income tax relief.   

Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Currently though, there are a few key taxes that all investors will likely be affected by. 

Income tax is primarily levied on employment income, but it can also be paid on dividend income that rises above certain allowances.  For the 2026/27 tax year, the standard personal allowance is £12,570, which is the amount of income that a person does not have to pay tax on. 

Beyond the personal allowance, income tax is paid at different rates depending on your income and where you live in the UK. In England, Wales and Northern Ireland, the basic rate is 20%, the higher rate is 40% and the additional rate is 45%. Scotland has different income tax bands and rates for earnings, pension income and most other non-savings income. Savings and dividend tax rates are generally the same across the UK.

There is also income tax on interest to factor in. This typically concerns interest earned on savings, but there’s also interest earned from bonds. Here, there is a personal savings allowance of:

• £1,000 for basic rate taxpayers 
• £500 for higher rate 
• £0 for additional rate taxpayers 

If you go over your interest allowance, you would pay tax at your usual rate of income tax.

Dividend tax falls within the remit of income tax. Currently, no tax is paid on any dividend income that falls within the personal allowance. Beyond this, there is also a dividend allowance of £500 each year. Any dividend income above this is taxed at the following rates: 

• Basic rate: 10.75%
• Higher rate: 35.75%
• Additional rate: 39.35%

Capital gains tax (CGT) is levied on the profit made when an asset is sold at an increased value. This includes shares and certain business assets. CGT is only paid on gains made over the “Annual Exempt Amount” of £3,000, or £1,500 for trusts. 

The rates paid may be varied by the type of asset being sold, and the income tax band of the seller. A basic rate taxpayer’s CGT bill will depend on the size of their gain, and their taxable income. But for higher or additional rate taxpayers, 24% will be levied on gains made from April 6, 2026. 

It should be remembered that nothing can be guaranteed. You could maximise your ISA contributions every year for decades, utilise every single tax perk your pensions provide, and still end up with less than what you put in. 

Retirement and/or ISA perks depend on a number of factors, including the value of a plan when an investor decides to take their benefits, which are never guaranteed and can go down as well as up. 

Furthermore, the tax perks available can change as the economic climate evolves. Any rule changes will likely impact how investors approach their tax efficiency strategies.

Optimising for tax efficiency is not a “set it and forget it” process. Wealth preservation evidently requires consistent reviews and adaptation as the economic environment shifts. While challenging, it can potentially be achieved with tailored, robust wealth planning. 

This article is for information purposes only. It is not intended as investment advice.

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