4 powerful ways to pay less tax on your savings and investments

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Putting your wealth into savings and investments can be an effective way to generate growth for the future. When you come to retire, you can draw on these assets to supplement your pension and fund your ideal lifestyle. You may also use them to meet short- and medium-term financial goals.

However, it’s important to consider the tax you could pay on your savings and investments if you want to maximise your returns. Unfortunately, this is something that many people overlook.

While you may be aware of how much Income Tax you are likely to pay, for instance, you might be less clear about how tax on savings and investments works. The good news is, there are some simple ways to mitigate a large tax bill and retain more of your wealth.

There are several taxes you may pay on your savings and investments

Your savings and investments could be taxed in several different ways, which can make it challenging to mitigate a large bill.

If you have cash savings and investments outside of an ISA, you may be subject to the following taxes:

  • Income Tax on savings interest that exceeds your Personal Savings Allowance – £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers, and £0 for additional-rate taxpayers in the 2023/24 tax year.
  • Dividend Tax on any dividends that exceed your Dividend Allowance – £1,000 in 2023/24.
  • Capital Gains Tax (CGT) when selling or transferring assets. You may pay tax on any profits that exceed your Annual Exempt Amount of £6,000 in 2023/24.

Fortunately, with some forward planning, you can work to potentially mitigate these taxes and increase your returns.

Read on to learn about four powerful ways to reduce tax on your savings and investments.

1. Use your full ISA allowance each year

Saving and investing through an ISA is one of the most effective ways to mitigate a large tax bill, so you may want to check that you are taking full advantage of this tax wrapper.

The interest on any funds held in a Cash ISA are not subject to Income Tax. Additionally, you don’t pay Dividend Tax on dividends received from investments in a Stocks and Shares ISA. You won’t normally pay CGT when selling investments inside an ISA wrapper either.

You can contribute a total of £20,000 across all your ISAs in 2023/24. It may be beneficial to use as much of this ISA allowance as possible before saving and investing elsewhere if you want to reduce tax.

2. Be aware of your Personal Savings Allowance

The Bank of England (BoE) raised interest rates 14 consecutive times in an effort to control inflation over the last few years.

Savings account interest rates rose alongside the BoE base rate, which is good news for savers. However, it does mean that you may be more likely to pay tax on your savings interest in the near future.

Indeed, the Guardian reports that 2.73 million Brits were expected to pay tax on their savings interest in 2023/24, up from around 800,000 in 2021/22.

This is likely because higher interest rates mean that it is easier to exceed the Personal Savings Allowance – the amount of interest you can earn without paying tax.

In 2023/24, the Personal Savings Allowance is:

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

Say, for example, you are a higher-rate taxpayer and you have a non-ISA savings account with an interest rate of 5.16% – the best easy access savings account interest rate according to Moneyfacts on 5 December 2023.

In this case, you would only need £9,700 in a non-ISA savings account before paying tax on the interest.

That’s why it’s important to pay close attention to your Personal Savings Allowance and when you have used it up, consider alternative ways to hold your wealth.

3. Be efficient with your Capital Gains Tax Annual Exempt Amount

If you sell stocks and shares through an ISA, you do not normally pay tax on the profits. Yet, if you sell any qualifying assets outside of this tax wrapper, you may pay CGT.

Fortunately, you have an Annual Exempt Amount of £6,000 in 2023/24. This means you can make profits of up to £6,000 before you pay tax.

It is important that you consider this and use it in the most efficient way possible. Planning when you sell investments and spreading it out over multiple tax years, for example, can help ensure that you stay within your Annual Exempt Amount each year.

This is particularly important as the Annual Exempt Amount will fall to £3,000 in April 2024.

It is also important to note that you and your spouse each have your own Annual Exempt Amount and you can usually pass assets between you without paying CGT. Making full use of both allowances may help you avoid CGT when selling investments.

However, the rules around CGT can be complex, so it may be useful to seek professional advice to ensure that you don’t receive a surprise tax bill.

4. Increase your pension contributions

If you have used your full ISA allowance and are close to exceeding your Personal Savings Allowance, it may be beneficial to find other tax-efficient ways to invest your wealth for the future.

Increasing your pension contributions could be a good option here. You won’t pay tax on any of the investment returns, and you benefit from tax relief on your contributions. Additionally, you also receive employer contributions.

As such, payments that you make into your pension could be more valuable than wealth in a cash savings account, for instance. It is also a very tax-efficient way to hold your savings for the future.

Get in touch

If you are concerned about tax on your savings and investments, we can help you plan effectively.

Email enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

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