This guide to tax efficient investing provides key insights helping higher earners like you to understand more about this important topic.

Each part offers insights into the key terms most important in helping you on your way to investing tax efficiently. As a result, you’ll be better equipped to retain more of your hard earned wealth, and pay less tax.

Suppose you’re new to this topic, or are an experienced investor. This guide will help you broaden and expand your understanding of tax efficiency and the different tax-saving options available.

What is tax efficient investing?

Tax-efficient investing is the process of structuring investments to reduce tax liabilities while maximising returns.

For higher income earners, it involves using tools like ISAs, pensions, and other tax wrappers to shield any income, investment growth, and dividends from taxes.

For higher-net-worth individuals, it also includes leveraging reliefs, allowances, and strategies such as gifting or trusts.

The goal is to grow your wealth in compliance with tax laws while preserving more of your assets.

What are the benefits?

One of the key benefits of tax efficient investing is reduces the amount of taxes paid on income, capital gains, and dividends, allowing investors like you to retain more of their wealth.

It also increases the probability of long term portfolio growth by reinvesting tax-free returns.

For high earners and wealthy individuals, it provides a pathway to protect and pass on assets to future generations while complying with tax laws.

For higher income earners, certain tax efficient investments offer a way to significantly reduce their income tax.

The different types of tax efficient investments

Two of the most tax efficient investments include ISAs, pensions, which provide tax-free or tax-deferred growth. Combined, they are considered two of the most tax efficient investments for high earners and higher rate taxpayers. While each have their own benefits, they form part of an effective retirement plan.

Secondly, Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) offer tax relief for higher-risk investments.

Furthermore, offshore bonds and real estate investment trusts (REITs) provide further opportunities to reduce income and capital gains tax.

Understanding your tolerance for risk

Each investment type is designed to optimise returns while reducing tax exposure, offering flexibility and security for diverse financial needs.

However, some are riskier than others.

Overall, pensions are generally considered lower-risk investments compared to Venture Capital Trusts. And ISAs are often thought of as lower risk than EIS or other forms of venture capital.

Tax efficient investing: 36 terms you need to know

Now, let’s get started with our guide to the main terms and phrases related to tax efficient saving and investing.

1. Agricultural property relief (APR)

Agricultural Property Relief provides inheritance tax (IHT) relief for qualifying farmland and agricultural assets. This allows farming families to pass their estates to future generations more efficiently.

However, recent reforms in the 2024 Budget capped this relief for estates exceeding £1 million, requiring proactive planning.

  • Qualifying assets: Farmland, farm buildings, and agricultural tenancies may qualify.
  • 50%-100% relief: Depending on the asset type and use, relief varies.
  • Planning required: Ensure the property qualifies by documenting active agricultural use.

Preserving family farms often requires integrating APR with other IHT strategies, such as discretionary trusts or gifting.

2. Alternative investments

Alternative investments encompass non-traditional assets like fine art, wine, private equity, hedge funds, and collectables. These provide diversification and, in some cases, unique tax advantages.

  • They reduce exposure to traditional market risks (e.g., stock market volatility).
  • Assets like art or antiques may be exempt from capital gains tax if categorised as “wasting assets.”
  • Private equity and hedge funds offer access to exclusive opportunities not available to retail investors.

While these investments often require substantial capital, they can deliver high returns while diversifying a portfolio.

3. Annual dividend allowance

The annual dividend allowance is a tax-free threshold for dividend income, currently set at £1,000 (2024/25). Structuring investments to maximise this allowance is critical for tax efficiency.

  • Divide shareholdings between spouses to make the most of each partner’s allowance.
  • Combine the allowance with ISAs or pensions to shelter additional dividends.
  • Business owners should consider dividends as part of a tax-efficient remuneration strategy.

Despite its recent reduction, the dividend allowance remains a valuable tool for tax efficient investing.

4. Asset allocation

Asset allocation balances investments across categories like equities, fixed income, property, and alternatives. It’s the cornerstone of managing risk and optimising returns.

  • Growth assets: Equities and real estate provide long-term appreciation.
  • Stability assets: Bonds and cash provide stability during market downturns.
  • Alternatives: Hedge funds, private equity, and commodities diversify exposure.

Aligning your asset allocation with risk tolerance and goals ensures a balanced and tax-efficient investment portfolio.

5. Budget 2024 tax changes

The 2024 Budget introduced reforms impacting pensions, inheritance tax, and business reliefs. These changes include incorporating pension pots into taxable estates and capping reliefs like Business Property Relief (BPR).

  • Pensions are now subject to inheritance tax, requiring new estate planning strategies.
  • Reliefs for business and agricultural properties have been capped, increasing tax liabilities for large estates.
  • Tax-efficient gifting and trust strategies will be essential to offset these changes.

Adapting to these reforms is critical for preserving wealth under the new tax landscape.

6. Business property relief (BPR)

Business Property Relief significantly reduces inheritance tax on business assets like shares in unquoted companies or family-run businesses.

  • 100% relief: Applies to qualifying business assets (e.g., shares in trading companies).
  • 50% relief: Available for certain assets, like property used for business purposes.
  • Ensures that businesses can be passed to the next generation without being sold to pay tax.

Planning ahead ensures assets qualify for relief, helping families retain ownership of valuable businesses.

7. Capital allocation

In terms of tax efficient investing, capital allocation refers to the strategic distribution of funds across various asset classes to maximise returns while managing risk and taxes.

  • Diversify: Spread capital across equities, fixed income, and alternatives to minimise risk.
  • Tax-efficient wrappers: Allocate funds into ISAs and pensions to reduce tax liabilities.
  • Reassess regularly: Reevaluate your capital allocation as goals or market conditions change.

For affluent individuals, proper asset allocation ensures all available capital is deployed tax efficiently.

If you’re looking to accumulate wealth, and mitigate taxes, researching the best investments for high net worth individuals, is a good place to start.

Each investor’s goals and capacity for risk and loss are different, so understanding the different types of investments is essential to developing your knowledge.

8. Capital gains allowance

The capital gains allowance lets individuals make tax-free profits on asset sales, up to £6,000 in 2023/24.

  • Timing sales: Spread disposals over multiple tax years to use allowances effectively.
  • Joint ownership: Transfer assets to a spouse to double the available allowance.
  • Tax-efficient investment: Hold appreciating assets within ISAs or pensions to avoid capital gains tax entirely.

Leveraging this allowance reduces taxable income and preserves wealth.

9. Capital gains tax (CGT)

Capital gains tax applies to profits from selling investments or property. High-net-worth individuals face higher rates, making CGT planning crucial.

  • Invest in ISAs or pensions to shelter growth from tax.
  • Use deferral schemes like EIS to postpone liabilities.
  • Offset gains by selling underperforming assets to realise capital losses.

Proper planning ensures more profits remain in your hands.

10. Charitable giving

Charitable giving benefits both the donor and the recipient by reducing taxable income and supporting meaningful causes.

  • Donations through Gift Aid boost the value of your contribution while allowing higher-rate taxpayers to claim additional relief.
  • Gifts to charities are exempt from inheritance tax, reducing estate liabilities.
  • Donating assets like shares or property avoids capital gains tax.

Incorporating charitable giving into your financial plan aligns philanthropy with tax efficiency.

11. Charitable trusts

Charitable trusts provide a tax-efficient way to support charities while reducing inheritance tax liabilities.

  • Assets held in the trust are exempt from inheritance tax.
  • They provide long-term funding to charities while offering flexibility in asset management.
  • Additional tax relief is available for qualifying donations.

These trusts balance philanthropy with effective financial planning.

12. Corporate bonds

Corporate bonds are fixed-income investments issued by companies. They provide regular interest payments and are less volatile than equities.

  • Invest through ISAs or pensions to shelter interest income from taxes.
  • Use bonds to diversify your portfolio, balancing riskier assets like equities.
  • Corporate bonds are ideal for generating stable, tax-efficient income.

13. Corporation tax

Corporation tax applies to company profits, but strategic planning can help business owners reduce their tax burden.

  • Contribute company profits to pensions to reduce taxable income.
  • Reinvest profits to grow the business, rather than withdrawing them as income.
  • Use capital allowances to offset the cost of business investments.

Effective planning aligns corporate goals with tax efficiency.

14. Discretionary trusts

Discretionary trusts allow trustees to manage distributions based on the changing needs of beneficiaries, offering flexibility and control.

  • Protect assets from creditors or irresponsible spending by beneficiaries.
  • Mitigate inheritance tax by removing assets from the taxable estate.
  • Adapt to future circumstances, such as changes in tax laws or family dynamics.

Trustees must ensure compliance with HMRC regulations to maximise these benefits.

15. Dividend allowance

The dividend allowance permits tax-free income from dividends up to £1,000 annually. Proper planning ensures this allowance is fully utilised.

  • Structure shareholdings between spouses to maximise allowances.
  • Use ISAs to shelter dividends beyond the tax-free threshold.
  • Incorporate dividends into a balanced, tax-efficient portfolio strategy.

16. Ethical and sustainable investments

Ethical and sustainable investments prioritise companies that adhere to environmental, social, and governance (ESG) principles. These investments align with personal values while offering long-term growth potential.

  • Tax advantages when held in ISAs or pensions.
  • Investments in renewable energy and green bonds may qualify for government incentives.
  • Growing demand for ESG-focused companies often drives long-term capital appreciation.

For investors who value both profit and purpose, ESG investing provides a balanced approach.

17. Estate valuation

Estate valuation calculates the total worth of assets, including property, investments, and personal belongings, to determine inheritance tax liabilities.

  • Appraise all assets, including property, shares, and personal possessions.
  • Account for debts or liabilities, which can offset the taxable value of the estate.
  • Regularly update valuations to reflect market changes.

An accurate estate valuation lays the foundation for minimising IHT liabilities.

18. Fixed income

Fixed-income investments, such as government or corporate bonds, offer regular interest payments and are typically less volatile than equities.

  • Provides stability during market downturns.
  • Generates predictable income streams, ideal for retirees.
  • Tax efficiency when held in ISAs or pensions, shielding interest income from tax.

Fixed income forms an essential part of a diversified, tax-efficient portfolio.

19. Gift with reservation

A gift with reservation occurs when an asset is transferred to a recipient, but the donor continues to benefit from it (e.g., living in a gifted property rent-free). Such gifts are typically included in the donor’s estate for inheritance tax purposes.

  • Pay market rent if living in a gifted property to remove the “reservation.”
  • Transfer ownership of income-producing assets while ensuring no benefits are retained.
  • Consult an adviser to structure gifts to maximise IHT benefits.

Removing the “reservation” ensures the gift reduces estate value effectively.

20. Gifting to reduce IHT

Gifting during one’s lifetime is a powerful strategy for reducing inheritance tax, as it lowers the taxable value of the estate.

  • Annual exemption: Gift up to £3,000 per year tax-free.
  • Small gifts exemption: Give up to £250 per recipient without impacting the £3,000 limit.
  • Seven-year rule: Larger gifts may avoid IHT if the donor survives for seven years.

Combining these strategies ensures efficient wealth transfer while reducing IHT liabilities.

21. Higher-rate taxpayer strategies

Higher-rate taxpayers pay 40% on income exceeding £50,270, making tax-efficient planning essential to reduce liabilities.

These strategies help high earners keep more of their income while staying compliant with HMRC regulations.

22. HMRC (Her Majesty’s Revenue and Customs)

HMRC is responsible for collecting taxes and ensuring compliance with UK tax laws. For high-net-worth individuals, understanding and navigating HMRC rules is essential for effective tax planning.

  • Use allowances and reliefs, such as the personal allowance and capital gains allowance.
  • File tax returns accurately and on time to avoid penalties.
  • Seek advice from qualified professionals to optimise tax efficiency.

Staying compliant ensures smoother financial management and avoids unnecessary scrutiny.

23. Inheritance tax planning

Inheritance tax planning ensures more of your wealth is passed to your beneficiaries, rather than being lost to taxes.

  • Trusts: Protect assets and minimise tax.
  • Residence nil-rate band: Reduces tax on family homes passed to descendants.
  • Gifting: Transfer assets early to reduce estate value over time.

An effective plan protects family wealth and aligns with long-term family wealth goals.

24. Investment risk

Investment risk refers to the potential for loss or lower-than-expected returns. Different asset classes carry varying levels of risk, making diversification essential.

  • Market risk: Stocks are impacted by market fluctuations.
  • Credit risk: Bonds may default, leading to loss of principal.
  • Liquidity risk: Real estate or alternatives may be difficult to sell quickly.

Mitigating risk involves balancing high-growth assets with stable investments.

25. Investment wrappers

Investment wrappers like ISAs, pensions, and offshore bonds shield assets from income tax and capital gains tax, allowing tax-efficient growth.

  • Tax-free withdrawals from ISAs provide flexibility.
  • Tax relief on pension contributions helps reduce taxable income.
  • Offshore bonds allow tax deferral until withdrawals are made.

Strategic use of wrappers maximises returns while reducing tax exposure.

26. ISAs (Individual Savings Accounts)

ISAs help reduce taxes and provide tax-free growth and withdrawals, making them a vital tool for long-term financial planning.

  • Cash ISAs: Safe savings with tax-free interest.
  • Stocks and Shares ISAs: Offer higher growth potential by investing in equities.
  • Lifetime ISAs: Designed for first-time buyers or retirement savings.

With an annual contribution limit of £20,000, ISAs should be maximised each year.

27. Maximising pension contributions

Pensions are one of the most tax-efficient ways to save for retirement. Contributions reduce taxable income, and investment growth is tax-free within the pension.

  • Use the annual allowance of £60,000 (2023/24) or carry forward unused allowances from the past three years.
  • Negotiate higher employer contributions as part of your salary package.
  • Opt for salary sacrifice to boost contributions while reducing tax and National Insurance.

Higher-rate taxpayers benefit significantly from the tax relief pensions provide.

28. Mutual funds

Mutual funds pool investments from multiple investors to create a diversified portfolio, managed by professionals.

  • Diversification reduces risk compared to investing in individual stocks.
  • Easy to access through ISAs and pensions, making them tax-efficient.
  • Professional management saves time and ensures expertise.

They are an excellent option for individuals seeking hands-off, diversified investment growth.

29. Offshore bonds

Offshore bonds allow tax-efficient growth by deferring income and capital gains tax until withdrawals are made.

  • Flexible access to global investment opportunities.
  • Ability to withdraw 5% of the original investment annually without immediate tax liability.
  • Useful for estate planning, as they allow income to be timed strategically.

They are ideal for higher income earners and high-net-worth individuals seeking tax deferral and flexibility.

30. Pension consolidation

Pension consolidation combines multiple pension pots into a single scheme, such as a Self-Invested Personal Pension (SIPP).

  • Simplifies management and reduces administrative fees.
  • Allows for better control over investments.
  • Ensures alignment with long-term retirement goals.

Consolidation is particularly useful for individuals with multiple pensions from different employers.

31. Premium bonds

Premium bonds are a government-backed savings product that offers tax-free prizes instead of interest.

  • Prizes are entirely tax-free, making them attractive for higher-rate taxpayers.
  • Savings are secure, backed by the UK government.
  • While returns are not guaranteed, they offer a low-risk savings option.

They are ideal for risk-averse savers looking for tax-efficient alternatives.

32. Salary sacrifice

Salary sacrifice reduces taxable income by exchanging a portion of salary for non-cash benefits, like pensions or childcare vouchers.

  • Reduces income tax and National Insurance contributions.
  • Boosts pension savings efficiently.
  • Allows access to additional perks, such as electric vehicles.

This is an effective way for higher-rate taxpayers to save money while securing future benefits.

33. Small gifts exemption

The small gifts exemption allows tax-free gifts of up to £250 per person annually.

  • Give small amounts to multiple recipients without impacting the £3,000 annual gift allowance.
  • Combine with other exemptions to transfer wealth effectively.

It’s a simple yet powerful tool for estate planning.

34. Structured products

Structured products combine financial instruments to offer customised investment solutions, often with built-in capital protection.

  • Tailored to meet specific risk and return objectives.
  • May offer tax efficiency when held within ISAs or pensions.
  • Suitable for investors seeking a balance between growth and capital preservation.

They are a versatile tool for high-net-worth investors with specific goals.

35. Time in the market vs. timing the market

“Time in the market” emphasises the importance of staying invested long-term rather than trying to predict short-term price movements.

  • Compounding amplifies returns over time.
  • Reduces the risk of missing key growth periods.
  • Tax-efficient wrappers like ISAs enhance long-term gains by shielding growth from taxes.

This strategy highlights the importance of patience and consistency in building wealth.

36. Venture Capital Trusts (VCTs)

VCTs invest in smaller UK businesses and offer substantial tax benefits, including 30% income tax relief and tax-free dividends.

  • Significant tax incentives offset the higher risk.
  • Long-term growth potential from early-stage businesses.
  • Diversifies portfolios beyond traditional asset classes.

While higher-risk, VCTs provide unique opportunities for growth-focused investors.

Tax efficient investing – FAQs

Keen to learn more about investing tax efficiently?

Read through this series of relevant questions and answers.


What is the most tax-efficient way to invest in the UK?

The best tax-saving investments include ISAs (tax-free growth and withdrawals), pensions (tax relief on contributions), Venture Capital Trusts (VCTs), and Enterprise Investment Schemes (EIS). These options reduce tax liabilities on income, growth, and dividends, allowing investors to increase the potential for higher returns while minimising tax.


What are the benefits of a diversified investment portfolio?

A diversified portfolio reduces risk by spreading investments across different asset classes, such as equities, bonds, property, and alternatives. This approach minimises the impact of poor-performing assets while maximising returns over time. Diversification ensures financial stability and allows investors to align their portfolio with risk tolerance and long-term goals.


What are the best tax-free investments?

The best tax-free investments include ISAs (cash and stocks & shares) and premium bonds. ISAs provide tax-free growth and withdrawals, while premium bonds offer tax-free prizes backed by the UK government. Both are ideal for tax-free savings and low-risk returns.


Is 100k in savings a lot in the UK?

£100k in savings is a significant amount, but its adequacy depends on personal financial goals. Investing part of this amount in tax-efficient options like ISAs or pensions can provide better returns over time while reducing taxes. 


How can I be more tax-efficient?

To be a more tax-efficient investor, start with maximising your ISA and pension contributions. Also, consider use salary sacrifice schemes, and take advantage of tax reliefs like VCTs or EIS. Regularly review your investments and structure them within tax-efficient wrappers to reduce liabilities and boost returns.


How are ISAs and pensions tax efficient?

ISAs provide tax-free growth and withdrawals, allowing investors to avoid income and capital gains tax. Pensions offer tax relief on contributions, tax-free investment growth, and an optional tax-free lump sum upon retirement. Both are essential tools for building wealth while reducing taxes and setting yourself up for the potential for better long-term returns.


What is the 60% tax trap?

The 60% tax trap occurs when earnings between £100,000 and £125,140 face an effective tax rate of 60% due to the gradual loss of the personal allowance. Reducing taxable income through pension contributions or salary sacrifice can help avoid this trap.


Where should I put 20k in savings in the UK?

Maximise your ISA allowance by placing up to £20k in a Cash ISA or Stocks & Shares ISA for tax-free returns. Consider premium bonds for risk-free, tax-free prizes, or contributing to a pension for tax relief and a solid retirement fund.