Want to be tax-efficient but don’t know where to start?

If you’re reading this, I’m pretty sure I don’t need to tell you that being tax-efficient is a good thing.

It sits in the same category as eating a balanced diet, exercising regularly and drinking more water. We know it’s good for us. But knowing something and actually doing something about it aren’t always the same thing.

Investing tax-efficiently doesn’t need to be taxing. You don’t need to understand every rule or allowance to make better choices. Sometimes it’s simply a case of knowing where to start - and taking the plunge.

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Ask yourself… what are you saving for?

Many tax-efficient investing decisions begin with your financial goal and your timeframe.

If you’re saving for something in the nearer term - perhaps a house deposit, a special trip, or building up a financial buffer - flexibility is important. You want your money to be accessible if plans change, but you also don’t want tax quietly chipping away at any growth along the way.

That’s where an ISA can make a real difference. Any interest, dividends or gains your money makes inside an ISA are free from UK tax. And because your money isn’t locked away, you can access it if you need to. It’s a simple, effective way to save or invest without adding unnecessary complexity.

• Learn more about our award-winning Stocks and Shares ISA

If you’re thinking about future you, pensions are designed to reward long-term thinking. While your money is tied up until later life, the tax advantages are hard to ignore. Contributions benefit from tax relief, meaning the government adds to what you put in, and your investments can grow free from tax within the pension wrapper.

It’s one of the clearest examples of tax efficiency working quietly in your favour - without you needing to do anything complicated.

• Learn more about our award-winning Self-Invested Personal Pension

Make the most of your tax-efficient allowances

There are limits on how much you can save or invest in certain tax-advantaged accounts each year.

For ISAs, the allowance is currently £20,000 a year. You can spread this across different types of ISA, but once the tax year ends, any unused allowance is lost. It doesn’t roll over. If you don’t use it by 5 April, you can’t reclaim it later.

Pension allowances work slightly differently. Most people can contribute up to £60,000 a year, and in some cases you may be able to carry forward unused allowances from previous years. That flexibility can be helpful, but the underlying principle is the same - allowances reward those who plan ahead.

This is one of the reasons allowances can get pushed down the to-do list. They can feel quite meaningless unless you use them and feel the full financial benefit they offer.

The important thing to remember is that you don’t need to make any decisions on what to do with the money you’ve saved or invested before the 5 April deadline. Simply using the allowance - by getting money into the right wrapper - can be enough. If you’ve chosen to put your money into a SIPP or Stocks and Shares ISA, you can take your time deciding how to invest it later.

There are also a number of other tax-efficient allowances to be aware of - from Capital Gains Tax to Dividends Tax and Marriage Allowance. It really can pay to be allowance savvy.

• Learn about your 2025/2026 tax allowances

Close to a critical tax threshold? Use tax-efficiency to your advantage

Tax-efficient decisions can be particularly valuable if you’re close to a key tax threshold.

If you’re nearing the £100,000 personal-allowance taper (where every extra £2 of income costs you £1 of allowance) or the £50,270 higher-rate threshold, making a pension contribution can reduce your taxable income - potentially keeping you below these thresholds and lowering the tax you pay overall.

Topping up a SIPP in the final days before 5 April can sometimes be quicker than arranging Additional Voluntary Contributions (AVCs) through payroll. And you decide exactly when the money goes in - avoiding some of the back-and-forth that can be associated with setting up AVCs.

This won’t be right for everyone, but if you’re close to a critical threshold, this flexibility could help you keep your personal allowance or limit how much income is taxed at a higher rate.

• Read: the hidden 60% tax rate – and how to avoid it.
• Learn more about the tapered annual allowance

Can being tax-efficient really make that big a difference over time?

In a word, yes. When money is held outside tax-efficient wrappers, you may pay tax on income or gains as you go. Inside an ISA or pension, those taxes don’t apply. More of your money stays invested, where it can continue to grow.

Over time, that difference can be significant - not because you took more risk or made smarter market calls, but simply because you put your money in the right place from the start.

Take the below example. If you were lucky enough to be able to max out your ISA allowance since they were introduced back in 1999 in the FTSE All-Share, you’d have invested a total of £333,760. And your returns would equal a massive £837,630 - with tax-free gains of £503,870.¹ This is of course illustrative only. The value of investments can go up and down so you may get back less than you invest.

• Read more about being tax-efficient in our principles for good investing.

Time is of the essence - 5 April isn’t far away

With the end of the tax year looming, this is where tax efficiency becomes less theoretical and more time sensitive. ISA allowances are very much a use it or lose it perk. If you don’t use your allowance by 5 April, it disappears for good.

Pensions offer a little more breathing room. While there’s still an annual allowance, you may be able to carry forward unused allowance from previous tax years, which can make pensions more flexible. Even so, the system favours those who act sooner rather than later - and taking a small step before the tax year ends can give you far more options down the line.

Got a burning question you want to ask? Why not drop us a line. Click here to ask your question.

• Read: ISA, pension or pay down mortgage - which is best?
• Read: 5 smart moves to make before 5 April
• Read: Maxing your allowances can make a massive difference

Source:

¹ LSEG, based on the maximum ISA allowance invested in the FTSE All-Share on the first day of each tax year with income reinvested from 6.4.99 to 6.2.26

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.