“Tax complexity itself is a kind of tax.”[1]. With the intricate tax system we have in the UK, this couldn’t be more true, but while certain aspects of investing are out of our control, seeking financial advice can help optimise investment strategies by avoiding losing money to unnecessary taxes. Let’s explore five of the most tax-efficient investment strategies in the UK today.
Pensions – investing for the long term
With generous tax reliefs, investing into a pension pot has historically been one of the best ways of investing for the long term for UK residents, with the standard annual allowance remaining at £60,000 for the current tax year (2025/26) – or your relevant UK earnings, if lower.
Whether it’s a workplace pension or a private pension, tax relief on contributions of 20% at source and any applicable balance via self-assessment is given, with the amount of tax relief remaining within the pension scheme. Any gains made on investments within pension schemes are also free of Capital Gains Tax (CGT).
On retirement, 25% of the fund is usually available as a tax-free lump sum, after which pension withdrawals are taxable as income.
You can also save for your child’s future with children’s pensions, which are available from birth. The current contribution limit for tax relief is £2,880 per tax year, with tax relief of £720 (20%) of the gross contribution, equating to £3,600.
The impact of long-term compound growth in a tax-efficient environment shouldn’t be underestimated. Investing in a pension from a young age – where money is effectively locked away and growing tax free until retirement – can reap huge financial rewards.
Individual Savings Accounts (ISAs) – tax-efficient wealth planning with accessibility
For tax-efficient investing with accessibility, ISAs are one of the most tax-efficient vehicles for growing wealth in the UK. Following backlash from banks and building societies, Chancellor Rachel Reeves may from plans to cut the tax-free limit on cash ISAs but remains eager to encourage investing into the UK and UK companies via ISAs. She announced in her recent Mansion House statement that the Government is working with the Financial Conduct Authority (FCA) on a “brand new type of targeted support for consumers”[2].
ISAs act as a ‘wrapper’ to safeguard your money from tax. With about £726 billion currently invested in UK ISA accounts (most of this invested in stocks and shares ISAs), and a further £9.9 billion held in Junior ISAs[3], their popularity has soared and there are four main choices of ISA products currently available:
- cash ISA
- stocks & shares ISA
- Innovative Finance ISA (IFISA)
- Lifetime ISA (LISA)
With the exception of the Lifetime ISA (which was introduced to help young adults save for their first home or retirement), the overall annual contribution limit to an individual’s ISA account is currently £20,000.
Any money withdrawn during the tax year cannot be replaced if the overall sum of deposits breach the £20,000 limit. However, with a Flexible ISA you’re allowed to withdraw and replace money within the same tax year without affecting your annual allowance.
All types of ISAs allow the invested amount to grow free of Income Tax and Capital Gains Tax. Unlike pensions, money you invest into an ISA may have been taxed already as earned income but will not be taxed on withdrawal. It should be noted that any UK share purchases within ISAs are subject to Stamp Duty Reserve Tax, with a current rate of 0.5%.
Junior ISAs (JISAs) have also been available since 2011, with a current annual limit of £9,000. These accounts can be a great way to see the effect of long-term compound growth, as well as teaching children the value of saving. Although the JISA is controlled by the parent/guardian until the child’s 16th birthday, the child won’t be able to access the money until they turn 18.
Venture Capital Schemes – the risk/reward option
Introduced to encourage economic growth through investment into UK early-stage companies and innovative startups, and with various new initiatives along the way, there are now three main types of Venture Capital Schemes available with similar tax reliefs but differences in structure:
- Venture Capital Trusts (VCTs)
- Enterprise Investment Scheme (EIS) investments
- Seed Enterprise Investment Scheme (SEIS) investments
These schemes offer generous tax-efficient investment opportunities for those minded and able to take the inherent investment risks.
The rules are intricate and these investments require expert advice; here we look at a summary view.
Venture Capital Trusts (VCTs)
VCTs are companies listed on the London Stock Exchange that raise money to invest in young, innovative (often privately-owned) companies. Unlike EIS and SEIS, they invest in multiple companies and usually with the use of a fund manager.
To help these companies grow, the Government offers generous upfront and ongoing tax relief to VCT investors:
- up to 30% Income Tax relief at outset
- dividends free from Income Tax
- growth in value of shares not subject to Capital Gains Tax
VCTs have an annual investment limit of £200,000 and a holding time of five years.
Enterprise Investment Scheme (EIS)
More niche than VCTs and investing in smaller, higher-risk companies, EIS opportunities aim to counter the high-risk nature of investing in business startups by offering a plethora of tax incentives:
- up to 30% Income Tax relief on investments up to £1 million
- free from Capital Gains Tax (CGT) after a three-year holding period
- CGT deferral if the gain is reinvested in EIS-qualifying shares
- investment losses can be offset against Income Tax in the current or previous tax year
- Inheritance Tax (IHT) exemption after two years
The investment allowance increases by a further £1 million (total £2 million) provided all investments over the original limit are invested into knowledge-intensive companies.
The maximum trading period for EIS investments is seven years.
Seed Enterprise Investment Scheme (SEIS)
The SEIS has even tighter restrictions for investment criteria – SEIS-qualifying companies can only raise a maximum of £250,000 through the scheme, be less than three years old, have fewer than 25 employees, gross assets of less than £350,000, and have a maximum trading period of two years – but even more generous tax benefits are available as an incentive to counter its high-risk nature:
- up to 50% Income Tax relief
- tax-free growth
- up to 50% capital gains reinvestment relief as long as the value is reinvested in SEIS-qualifying shares
- potential for IHT relief
SEIS shares must be held for a minimum of three years to retain these tax reliefs.
Getting it right for your circumstances
The tax efficiency of your investment portfolio can be optimised by using a combination of tax-efficient products – for example, investing in an ISA for tax-free growth while gaining tax relief at source by contributing to a pension.
For experienced investors, the addition of EIS, SEIS or VCT investing could formulate a comprehensive, diversified portfolio to maximise tax advantages across the board.
Your investment plan should always be tailored to your individual financial needs and goals, with consideration to your investment risk profile. At Mattioli Woods, we offer a complimentary consultation to fully understand your circumstances and offer appropriate advice to help you make the most of your investment wealth.
Important information
As with all investments, your capital is at risk. The value of your investments and the income from them may fall or rise and there are no guarantees. Past performance is not a guide to future returns. Tax treatment of investments and income depends on an individual’s circumstances and may be subject to change in future. The content of this article is for information only and does not constitute advice.
All content correct at time of writing.
Sources:
1 Quote attributed to former United States Senator Max Baucus
2 https://www.gov.uk/government/speeches/rachel-reeves-mansion-house-2025-speech
3 ISAs unpacked: who holds them and how much do they have? – IFA Magazine
