The value of your investment can go down as well as up and you may get back less than was paid in. Laws and tax rules may change in the future. Your own circumstances and where you live in the UK will also have an impact on tax treatment. The information here is based on our understanding in April 2020.

Tax efficiency: the basics

Pensions and ISAs are both tax-efficient ways to save money for the future. Read on to find out why and what this could mean for your money.

Individual Savings Accounts (ISAs)

When you save or invest money into an ISA, any interest or investment growth you get is tax efficient. You also don't have to pay any tax on money you take out of an ISA.

However, there is a limit on how much you can save or invest in an ISA each tax year, known as the annual ISA allowance. For 2020/2021 this is £20,000.

You can put all your money into one type of ISA or you can split your money between different types. For example, you could save £5,000 into a Cash ISA and invest £15,000 in a Stocks & Shares ISA.

You can learn more about ISAs, apply for an ISA and more here:

Explore ISAs

Pensions

Investing in a pension plan gives you the following tax advantages:

  • Pension tax relief: Not all pension plans work this way, but typically you will get tax relief on the money you pay into your pension plan. For example, if you're a basic rate taxpayer and put £80 into your pension plan, HMRC will pay an extra £20 into your pot. This is known as pension tax relief. This could effectively be even less if you're a higher or additional rate taxpayer. If this applies to your situation, you can normally claim any extra tax relief through your self-assessment tax return or by contacting HMRC.
  • Tax-efficient growth: As your pension pot is invested it could grow in value over time. You won't pay tax on this growth.
  • Tax-free lump sum: From age 55 (subject to change), you can normally take 25% of your total pension pot as a tax free lump sum. You don't have to take the lump sum, and can choose to keep it invested so it has a chance to potentially keep growing.

You can find out more about how pensions work, tax relief and more in our pensions basics guide:

Find out more

You can also download a factsheet about how pension tax relief and limits work here:

Download more information (391KB)

Inheritance tax

Inheritance tax may be due on your restate when you pass away. We've provided a link below to the Government's site where you can find out more about this.

Find out more about inheritance tax planning

Flexible

More about your tax-efficient options

You can get more information about pension plans and Stocks & Shares ISAs, and what they could mean for your long-term savings.