What investments are tax-free in the UK?

US President Benjamin Franklin said in 1789, “The Only Two Certainties In Life Are Death And Taxes.” Today, however, governments are offering several ways to reduce one of these certainties by offering tax-free incentives to encourage more people to save. 

An investor should strive to pay no more tax than needed. There are a multitude of investment opportunities available to reduce one’s tax liability. 

Tax-free saving and investments opportunities include:

Individual Savings Accounts (ISA)

ISAs are tax-efficient savings and investment accounts, offering an individual the opportunity to invest in a wide variety of shares, bonds, funds and investment trusts without incurring income tax on the income earned.

Individuals may invest £20,000 per year in ISAs tax-free. 

Stocks and Shares ISAs

A stocks and shares ISA is like a chocolate orange. Within the outer wrapper is a selection of investments in various asset classes. These might include unit trusts, investment trusts, ETFs (Exchange Traded Funds), stocks and shares, bonds and OEICs (Open Ended Investment Companies). 

The investor chooses from a variety of tailor-made options designed to correspond with his risk tolerance level.

An investor may spread the annual £20,000 allowance between Stocks and Shares ISAs and Cash ISAs in a tax year. 

Cash ISAs 

Cash ISAs are ideal tax-free investments if an individual is 16 years of age or over and a UK resident.

Funds in a cash ISA are accessible at any time. If an individual withdraws from the cash ISA, he can top up the fund at any time during the same year. The investment limit remains £20,000 regardless of the withdrawal value. 

An Individual can open one Cash ISA per tax year. Transferring funds from one cash ISA to another for a better interest rate is possible. However, to protect the tax-free status, the receiving Cash ISA should action the transfer. 

Innovative Finance ISA

An Innovative Finance ISA (IFISA) permits using the tax-free allowance while investing in P2P (Peer to Peer) lending. P2P lending is the practice of lending money to individuals or companies online by matching borrowers to lenders. A P2P investor earns tax-free income as monthly interest based on the period and risk of the investment.

Lifetime ISA

A Lifetime ISA is a long-term tax-free savings account. An individual may save up to £4000 per year, with the government adding a 25% bonus (limited to £1000 per year). The interest, income or capital gains earned from a Lifetime ISA is not subject to tax.

A Lifetime ISA is an ideal investment opportunity for a first-time buyer between 18 and 40. The investor must use the matured Lifetime ISA for a deposit for a first home or towards retirement savings.

Junior ISAs

A Junior ISA is a way to save tax-free on behalf of an individual’s children. Family and friends can invest up to £9000 (in 2020/2021) on behalf of a child.

No income tax or capital gains tax is due on the interest or investment gains.

Any child under 18, resident in the UK who does not qualify for a Child Trust Fund, can have a Junior ISA opened on his behalf.

National Savings and Investments (NS&I)

The Government ensures the safety of any investment in an NS&I. Additionally, interest earned from an NS&I investment is tax-free.

Premium Bonds

Premium Bonds is a Government-issued NS&I investment product. As opposed to being an interest-bearing investment, individuals qualify for a monthly prize draw and can win between £25 and £1 million tax-free.

Pension Savings 

The concept of a pension fund is straightforward. In the next few years, Government pensions are expected to be insufficient to support a family. Investing in a private pension is so advantageous.

The Government encourages individuals to save for retirement by offering tax relief on pension contributions.

Tax relief either reduces the tax bill or increases the amount paid into the scheme.

Over time, the pension fund growth is tax-free.

A person can withdraw 25% of the fund’s value at retirement age as a tax-free lump sum. The remaining 75% of the fund is payable monthly and taxable, along with any other income received.

Children’s Pensions

A parent can take advantage of tax-free opportunities by saving for a child’s future retirement in a Children’s Pension.

A parent can invest £2880 per tax year in 2020/2021 in a Children’s Pension. The Government tops up any contribution by 25%. This top-up is tax-free.

At age 18, the child becomes the owner of the pension. The funds are inaccessible until retirement, but the individual can continue to contribute to the fund.

Similarly to any pension fund, 25% can be withdrawn tax-free. After that, any income from the fund is taxable along with any other earnings. 

Bank and Building Society Accounts - Tax-Free Interest

A person is entitled to tax-free interest for the first £1000 earned on savings. The limit is £500 for higher rate taxpayers. 


Capital Gains Tax Exemptions

An investor in property may incur tax liability when selling the property or investments at a profit, commonly known as Capital Gains Tax.

The first £12300 profit from selling any investment assets in 2020/2021 is exempt from tax. 

After that, the tax paid is dependent on the individual’s tax band. 

The following CGT earnings are exempt from taxation:

  • Investments held in ISAs

  • UK Government bonds (gilts) or corporate bonds

  • Personal belongings to the value of £6000

  • Any profit made selling a primary dwelling.

For more advice on maximising your tax-free investments, call 020 3697 1700 or visit www.londonstonesecurities.co.uk