Another year of fiscal drag, and years to come
With personal allowances and income tax thresholds currently planned to remain frozen until 2031, the impact of so-called “fiscal drag” is becoming increasingly difficult to ignore. While the cost of living has continued to rise, tax thresholds have not kept pace, quietly drawing more individuals into higher tax brackets over time.
Assuming that tax thresholds will move in line with inflation is no longer a robust financial planning assumption. Similarly, relying on the ability to keep income within basic or higher rate tax bands may prove unrealistic without cutting your standard of living in the future.
This direction of travel with tax makes it essential for investors to seek strategies that minimise tax liabilities while maximising long-term investment returns. Understanding and leveraging tax efficient investments as part of your financial plan can provide a critical edge, helping to ensure that your assets work harder for you over time.
Below, we highlight a number of tax efficient investment and planning considerations worth reviewing as part of your wider strategy.
New ISA Allowances
ISAs remain as one of the most effective ways to save and invest tax-efficiently. A Stocks & Shares ISA allows individuals to invest in assets such as individual shares or pooled investments, including open-ended funds and investment trusts. Cash ISAs, by contrast, are typically held with a bank or building society and are designed for savings rather than investment.
From April 2027, the UK Government has announced it will reduce the annual cash ISA allowance, protecting savings from tax, from £20,000 to £12,000 for individuals under 65, while those aged 65 and over will retain the £20,000 limit. If you are aged 18 or over, you can contribute up to £20,000 to a Stocks & Shares ISA, and both types of ISAs still share a joint limit with tax-free profits.
These changes aren’t about increasing tax - the OBR estimates it will only raise £0.1bn - but rather is about encouraging individuals to invest and will also encourage Financial Advisers, Investment Platforms and Banks to consider how products are marketed in-light of new allowances.
While the objective is positive, creating different allowances complicates planning, so it remains to be seen as to whether this will help the Government get more people to invest.
Pensions
Pensions are a tax efficient way of saving for your future and should always be considered as part of your year-end tax planning activities.
Please refer to our Pensions section in this Guide which looks at making the most out of your pension in 2026.
You may also find this article useful, which breaks down the pension types, tax benefits and various points to consider when looking at pensions: MHA | The Power of Pensions
Bonds vs Offshore Bonds
For those who hold investments above the ISA allowances, and are paying punitive rates of tax for investments that aren’t in tax-wrappers, Onshore and Offshore Investment Bonds might be worthy of consideration.
These allow for the deferral of tax on profits, either to a future date, or potentially onto other individuals – as financial planners, considering your marginal rates of tax now, investments you are likely to hold, who will benefit from them and when, and what tax they may pay at the time all drives decision-making when it comes to holding unwrapped investments, onshore bonds or offshore bonds.
This is a particularly complex area, so receiving professional financial advice is crucial, as there are numerous calculations performed based on your circumstances to allow us to recommend the most suitable solution, or combination of.
Cryptocurrencies and the Evolving Investment Landscape
Many investment companies now hold digital assets like Bitcoin to diversify portfolios and hedge against inflation – some compare it to a digital gold. It’s a currency, so from an investment managers perspective that fact that this fluctuates in price is what provides value to an investment manager, and may perform differently to other asset classes as we move through economic cycles.
While individual investments into cryptocurrencies are high risk, in part because of its unregulated nature, discussion papers and draft legislation has been seen this year that may change the nature of cryptocurrencies moving forward.
Family Investment Companies (FICs)
A Family Investment Company (FIC) is a private company structure used in the UK to manage and pass on family wealth. It’s especially popular among high-net-worth families looking for a flexible alternative to trusts.
FICs can be a useful way to protect family wealth across generations, but the most appropriate structure will depend on the family’s circumstances and objectives.
A FIC enables parents and grandparents to retain control over assets whilst also protecting and enhancing wealth in a tax-efficient manner. Care should be taken with the structuring and funding of a FIC to ensure that the directors can invest tax efficiently and ensure future growth is protected.
Profits and gains made by a FIC will be subject to corporation tax at 25%, where these exceed £250,000. A lower rate of 19% may apply for some FICs where profits are not more than £50,000. Therefore, in many cases, this will still be lower than if the investments had been held directly or via trust, suffering income tax at 40%/45% and up to 47% from April 2027, and capital gains tax at a maximum of 24%.
If the company receives UK dividend income from investments in shares, this will be exempt from tax. However, other income, such as bank interest or rents from investment properties, will be taxable. Losses from a FIC’s rental business can be offset against other income in the company.
A FIC should be considered for long-term asset protection planning, as well in terms of the income needs of the family. Shareholders only pay tax personally when the FIC distributes income, or if it is wound up. There is merit in using a FIC to allow profits to be retained in the company until required and drawn when the individual’s personal tax rate may be lower.
Any investment gains and income could be paid into a pension plan for the benefit of the shareholders; therefore, it is recommended that parties to a FIC receive independent financial advice.
If you are seeking to preserve family wealth within a controlled family environment and/or wish to consider introducing the next generation into the decision-making about investments, please speak to a member of the MHA tax team about how a FIC could benefit you.
Venture Capital Trusts (VCTs)
Venture Capital Trusts (VCTs) are specialist tax-incentivised investments that enable individuals to invest indirectly in a range of small higher-risk trading companies and securities. VCTs are companies in their own right and, like investment trusts, their shares trade on the London Stock Exchange.
Shares in qualifying VCTs offer the following tax incentives:
- Upfront income tax relief at 30% of the amount subscribed, subject to a maximum investment of £200,000 per tax year. The investment must be held for a minimum of five years in order to retain the income tax relief. Note that income tax relief on the purchase of VCTs is available only where new shares are subscribed, and not for shares acquired from another shareholder.
- The rate of income tax relief on VCT investments will reduce to 20% from 6 April 2026 so there is a small window of opportunity to obtain relief at the higher 30% rate.
- Dividends received on VCT shares are exempt from income tax in respect of shares acquired within the ‘permitted maximum’ (including shares acquired from another holder).
- Gains are exempt from Capital Gains Tax (CGT) and losses are not allowable on the disposal of VCT shares (including shares acquired from another holder).
Enterprise Investment Schemes (EISs)
The Enterprise Investment Scheme (EIS) is a government-backed initiative designed to encourage investment in smaller, higher-risk trading companies. Tax relief is available to investors who subscribe for new shares in companies that qualify for relief under the scheme.
Under the EIS, your Income Tax liability for the tax year in which you make your investment, or the previous tax year, may be reduced by up to 30% of the sum invested. You can invest up to £1m under the EIS in a tax year or up to £2m if you invest at least £1m in knowledge-intensive companies (broadly these are early-stage businesses engaged in scientific or technological innovation).
If you sell your EIS shares at a profit after three years and the Income Tax relief claimed when they were acquired is not withdrawn, there is a Capital Gains Tax (CGT) exemption on the disposal of the EIS shares.
Losses on EIS shares (restricted by Income Tax relief given and not withdrawn) can be offset against gains or, alternatively, against general income in the tax year of disposal or the preceding year.
Inheritance Tax relief (via Business Relief) should be available for EIS shares provided they are held for two years.
In addition, capital gains arising on disposals of other assets may be deferred by reinvesting those gains in a subscription for qualifying EIS shares. The investment in EIS shares must be made in the period beginning one year before and ending three years after the disposal.
Prudent utilisation of the reliefs associated with tax-favoured investments as part of a balanced portfolio can make a big difference to future investment returns, but it is important to consider the risks associated with them and it is essential that professional advice is sought.
Speak with a financial adviser about how you can go about generating income from a variety of sources with different tax rules, to make the most out of your assets.
Dominic Thackray
Independent Financial Adviser
This content is for information purposes only and should not be relied upon as financial advice. Individual circumstances vary, and you should seek advice from a qualified Independent Financial Adviser to understand how different income sources and tax rules may apply to you.