Tax efficient wealth management

Wealth Management | Ceri Williams | Oxwich Accountancy



Growing your wealth and being able to retire when and how you want is a key financial goal for most people. Minimising the tax you pay is an important part of wealth management. In this guide we consider the tax aspects of the various ways in which you can save and invest your money. We also consider the different ways you can optimise your tax position.


Interest bearing savings are an important component in most people's wealth planning. Interest earned on savings is taxed at 20%, 40% and 45% depending on your overall tax level. However, basic rate and higher rate taxpayers are entitled to a tax free savings allowance each year. This means that the first £1,000 (basic rate taxpayers) or £500 (higher rate taxpayers) of savings interest will be free of tax.

If your savings income exceeds your tax free savings allowance, there are various ways tax free savings products you can use:

National Savings & Investments

National Savings provides a number of savings products where the interest income is tax free. Although these are unlikely to offer the most competitive returns, their tax efficiency can still make them highly attractive, especially to higher rate and additional rate taxpayers. A return of 1.5% on a National Savings product is equivalent to pre-tax returns on other products of 2.5% for a basic rate taxpayer and 2.73% for a higher rate taxpayer.

Investment bonds

These are technically in insurance product rather than a savings product. They allow you to invest a lump sum for a fixed period. You can withdraw up to 5% of the original invesment year year free of tax. On maturity of the bond you pay tax on the total gain. When calculating the gain the amounts withdrawn each year tax free are added back, meaning the withdrawals are deferrals of tax rather than outright tax savings. But if you expect to pay tax at a lower rate in the future this can still create tax savings. Note that even though the total gain is taxed in the year of maturity, there is a "top slice relief" that averages out the gain over the years of investment for the purpose of working out how much of the gain is chargeable at higher or additional rates.


You can also use your ISA allowances to shield yourself from paying Income Tax on savings interest. Any interest earned on savings within the ISA is tax free. However using your ISA to shelter savings income counts against your annual allowance so reduces the amount you can invest in other products. For this reason you should first consider use up your tax free savings allowance (where applicable) and consider using alternative tax free products for your savings.


You are taxed on investments in two different ways. You pay Income Tax on any dividend income received during the year and you pay Capital Gains Tax on any gains you make when selling an investment.

The first £2,000 of dividend income you receive is tax free. Dividend income after this is taxed at 7.5%, 32.5% and 38.5% depending on your overall tax level. When deciding what rate applies, your other income is looked at first so, for example, you'll only be entitled to the 7.5% rate if your other income is below the basic rate threshold.

You pay Capital Gains Tax at 10% or 20% depending on your overall income. Again your other income (including dividend income) is considered first when deciding what rate you pay. You are, however, entitled to an annual tax free allowance, currently £11,800.

There are number of investment products that have tax advantages:


Pension contributions can be the most tax efficient form of investment. Up to £3,600 can be invested per year regardless of your earning. For those with earnings, you can invest up to the lower of 100% of your earnings and £40,000. This allowance reduces for high earners as explained in this guide. There is alo a lifetime limit, currently £1m.

Pension contributions receive generous Income Tax relief, meaning that you receive (in total) a tax benefit equal to your marginal rate of tax on the amount you contribute. Dividends and capital growth within the fund are also free of tax (subject to the lifetime limit). These tax benefits should, however, be weighed against the fact that one invested, funds can't be withdrawn until at least 55. You also pay income tax on the amount you withdraw, although there is normally a net benefit since you will typically be paying tax at a lower rate when in retirement.

ISA allowances

Under current rules you can invest up to £20,000 each year into an ISA. Dividend income accruing in your ISA are tax free, and your investments are free from Capital Gains Tax on withdrawal.

Up to £4,000 of your £20,000 limit can be invested in a Lifetime ISA. You receive a 25% bonus on any investments you make into your Lifetime ISA, meaning that you'll receive £1,000 if you use your limit to the full. However:

  • Investments within your Lifetime ISA can only be withdrawn to purchase a first home or to fund retirement (after 60).
  • There is a penalty of 25% for any other withdrawal (unless you die or are terminally ill). This penalty doesn't only apply to your original investment but also the 25% bonus, meaning you lose 6.25% of your original investment.
  • You have to have started investing in a Lifetime ISA before you are 40, and can only invest until you are 50.
Venture Capital Trusts

Investments in Venture Capital Trusts receive tax incentives to encourage investment in smaller high-risk unquoted trading companies. A Venture Capital Trust is a quoted company that holds at least 70% of its investments in shares or securities of qualifying unquoted companies. They must distrubute at least 85% of their income and they must have a spread of investments with no single holding of more than 15% of the total fund. In return, they are exempt from tax on their capital gains.

Investments you make in Venture Capital Trusts, up to a £200,000 annual limit, may receive Income Tax relief of 30%. To qualify for this tax relief you must hold the shares for a minimum of five years. Dividends are tax free and any gain on disposal is exempt from Capital Gains Tax.

Enterprise Investment Scheme

The Enterprise Investment Scheme is another investment product that provides tax incentives to help smaller high-risk unquoted trading companies with raising capital.

Investors may be given income tax relief at 30% on their investment in qualifying companies, up to a £1m annual limit (or £2m limit for investment in knowledge-intensive companies). The income tax relief is withdrawn if shares are sold within three years. To qualify for this relief you must not be connected with the company you're invested in for the two years before or three years after investment. This means you cannot have a working relationship with the Company (e.g. you can't be an employee or director) and must not control directly, indirectly possess or be entitled to acquire more than 30% of the ordinary share capital in the company.

Gains on the disposal of EIS shares are exempt from Capital Gains Tax provided you've qualified for income tax relief. Unlike the VCT, losses on EIS shares are allowable for reducing your Capital Gains Tax on other gains, though the loss is restricted by the amoutn of the EIS income tax relief still attributable to the shares disposed of. A capital loss can also be set against income.

Gains on the disposal of any other assets can be deferred against subscriptions for shares in any EIS company. Shares don't have to have income tax relief attributable to them to qualify for this deferral relief. The original gain will become chargeable in the tax year when the EIS shares are disposed of (the disposal of the EIS shares themselves is exempt from Capital Gains Tax as explained above).

Seed Enterprise Investment Scheme

This is very similar to the Enterprise Investment Scheme, except that there are futher restrictions on how much you can invest and the type of companies you can invest in. These are typically newer and higher risk businesses. In return the income tax relief is more generous, at 50% of your investment.

Other products

Premium Bonds

An alternative form of investment, premium bonds are similar to savings except that instead of earning interest you are entitled to win tax free prizes. Unlike savings, your returns aren't guaranteed but they are a secure form of investment (as secure as other National Savings and Investment bonds) and you are able to withdraw your investment at any time.


Buy-to-let investments are an alternative method of investing your wealth. You benefit from increases in property value, and normally make a profit on renting the property. By using mortgages to fund purchases your investments can be highly geared (whereas most retail investors can't make geared investments in shares). The tax situation on buy-to-let investments is increasingly complex - for further details why not read our guide to taxation of buy-to-let properties.

Other tax saving strategies

Making use of family tax planning

If appropriate to you, holding your savings jointly with your spouse allows you to share their ISA allowance. If your investments exceed both ISA allowances, your family can also save tax if your spouse isn't fully using their personal allowance or the separate tax free allowances for savings income, dividends income and Capital Gains Tax .

The same tax planning applies to buy-to-let investments, where holding the property jointly allows you to split profits on rental in the year equally between both partners (saving Income Tax if your spouse pays tax at a lower rate) and to split the gain on selling the property; potentially saving Capital Gains Tax.

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Tax efficiency in how you invest can considerably increase your wealth and help you meet your financial goals. The right strategy can unlock considerable tax savings. We have a lot of expertise in tax efficient investing - why not find out more about how we can help you?