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Tax free Investments UK: Best tax free Investing

Many investors could be paying more tax than they need to. To make sure you are not one of these people, please take a few minutes to read this Moneyfarm article.

What are the tax free investments in the UK?•ISAs
•Child Trust Funds.
•National Savings and Investments (NS&I)
•Pension savings.
•Children’s pensions
What is the Personal Savings Allowance (PSA)?£1,000
What happens if I put more than 20000 in my ISA?The excess amount gets taxed
What is the maximum tax free lump sum?25%

Let’s kick off with a summary of the tax free investments UK options open to you.

  • Child Trust Funds
  • Individual Savings Accounts – (ISAs)
  • Pension Savings
  • Children’s Pensions
  • Premium Bonds – National Savings and Investments (NS&I)
  • Tax-free interest on bank and building society accounts
  • Tax-Free Bonds

All these types of accounts come under the banner of TFSA UK (Tax-Free Savings Account) funds.

With inflation as high as it is in 2022 and still being forecast to reach record heights for the first time in 40 years, you can’t afford to pay the tax man more than you should. So, choosing the right tax-free investments in the UK has never been more important.

This tax-free investment guide has been written to help you to retain as much of your savings and investments as legally possible. Please read on.

Tax-free interest bank and building society accounts and cash ISA funds

There is a difference between putting money in tax free investments in the UK and funding a tax free savings account. Putting money into a bank, building society account, or a Cash ISA account is not considered investing. It’s saving. These tax-free savings UK accounts put money into safe, liquid accounts. `There is little or no risk involved, and you can access your money at short notice, depending on the type of savings account you use.

These accounts allow you to take full advantage of your personal tax allowance. Basic taxpayers can earn up to £1,000 interest per annum tax-free, and higher rate taxpayers – up to £500 tax-free.

Investing is when you purchase assets such as stocks and shares to earn a good return. Investments are riskier as they are dependent on the stock market, which is notorious for experiencing higher highs and lower lows.

Another significant difference between saving and investing is that the interest on the former is minimal. In contrast, the tax-free interest on investments like tax-free ISAs UK is much higher.

Premium bonds (NS&I) and other tax-free bonds

Another popular type of saving fund is Premium Bonds. As the name suggests, these are “bonds.”  They are one of the safest forms of saving as the UK government underwrites them and they are available also a form of investment for children. However, they do not pay any interest.

There are other types of tax-free bonds UK investors can take up, such as tax-free municipal bonds UK funds. But, like most types of bonds, they pay poor interest because the risk is low and are usually underwritten by the government.

Children’s pensions and child ISAs

We’ve grouped children’s pensions and Junior ISAs because they both refer to investing on behalf of children. Parents or legal guardians can open both on behalf of a child from the day they are born.

The maximum amount that can be invested into a child pension is £3,600 a year. The Junior ISAs, which are long-term, tax free investments in the UK for children, have a maximum contribution limit of £9,000 per annum. The Junior ISA allowance can be paid as one lump sum or several lump sums from different contributors, provided the total is no more than £9,000 in any tax year.

We should also mention Child Trust Funds (CTFs). Unfortunately, the UK government stopped the availability of new Child Trust Funds in 2011. However, you can still pay up to £9,000 per annum into a CTF that you opened previously.

With all these types of funds, the child in whose name the account was opened can access the funds when they reach the age of 18.

Individual savings account (ISA) tax-free saving UK funds

An ISA TFSA account UK fund is one of the favourite tax free investment UK vehicles. We’ve already mentioned Cash tax-free ISAs UK funds as they are saving accounts rather than investment accounts.

The types of tax-free investment ISAs include:

  • Innovative Finance ISAs
  • Lifetime ISAs
  • Stocks and Shares ISAs

Innovative Finance ISAs support peer-to-peer lending. They are tax free investments UK investors use to lend money to borrowers. These borrowers might be individuals, businesses, or property developers. As savings and investments go, they are quite risky, and several peer-to-peer lending platforms have collapsed over the years.

Lifetime ISAs have twin targets – to help you buy your first property and save towards your retirement. They are one of the best tax free investments UK prospective house buyers can utilise as the government gives you a 25% bonus. If you save the maximum in this type of fund (£4,000 p.a.), the government will give you a £1,000 top-up.

Stocks and Shares ISAs are very popular UK tax free investment account vehicles, often described as tax wrappers. Any money you invest is free of both capital gains tax and income tax when you make withdrawals providing you keep below the income threshold.

Must you pay tax on stocks and shares ISAs?

You’ll be pleased to know you do not pay taxes on ISAs, as long as you stay within your £20,000 per annum personal ISA allowance. You don’t have to declare them on your tax return if you stay within the ISA allowance.

Are pension savings tax-free?

Is pension income taxable? – Unfortunately, it is. So in that sense, pensions may not be one of the best tax free investments UK investors can make. Having said that, you are entitled to 25% of your pension pot tax-free.

You qualify for tax relief in a tax year if your pension contributions don’t exceed 100% of your earnings, £40,000 or the lifetime allowance of £1,073,100 in your lifetime. Individuals who earn less than £3,600 can qualify for tax relief on contributions up to £3,600.

Basic rate taxpayers can claim 20% tax relief on their contributions. Pension tax relief for high earners works as follows:

Taxpayers who fall into the higher income tax rate get another 20%. Those in the additional-rate tax band get an extra 25%.

Any withdrawals over and above that 25% will be subject to income tax at the normal rates. You can check out the UK tax year dates 2022.

There is some good news: you stop paying national insurance contributions when you achieve the state pension age.

There is even better news, and it relates to inheritance tax. When left in the tax wrappers, you can inherit pension funds free of inheritance tax.

What other tax-free investments are there?

Another potential runner-up for the best tax free investments UK companies and investors can apply for is a Venture Capital Trust (VCT), types of which include the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). You can learn more about VCTs and tax relief from the Gov.UK website.

Closing thoughts

Knowing which investments are tax-free and to what extent is crucial. With this knowledge, you can build the most tax-efficient investment portfolio depending on your investor profile.


How much can I invest tax free each year?

It depends on the type of investment account. For stocks and shares ISAs or cash ISA tax free investments, the tax-free allowance is £20,000. The tax-free allowance for lifetime ISA is £4,000, while the tax-free allowance for junior ISA or child trust fund is £9,000. You get 25% of your pension pot tax-free. For children’s pension, the tax-free amount is £2,880. For bank and building society accounts, the first £500 to £1,000 you earn from savings is tax-free, depending on your income tax bracket. EIS, SEIS, VCT, and SITR have different tax relief amounts.

Do I have to pay tax on investments in the UK?

You have to pay capital gains tax on the sale of shares that are investing in an ISA or PEP, units in a unit trust, and specific bonds (excluding Premium Bonds and Qualifying Corporate Bonds). You will pay inheritance tax on a non-spousal estate above £325,000, while children or grandchildren are exempt from inheritance tax on estates below £500,000. You pay income tax on salary, business profit, and pensions.

How can high-income earners reduce taxes in the UK?

High-income earners can reduce their taxes by using tax free investments in the UK (ISA allowance). They can also contribute to their pension to get a 45% tax relief, transfer assets to a spouse or civil partner, and start a business using tax-relief schemes such as Venture Capital Trust (VCT) and Enterprise Investment Scheme (EIS).

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*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.