In recent months I’ve written extensively about the practical ways that anyone can earn more money. The announcement of the Autumn Budget 2023 got me thinking about the ways in which we can maximise our savings, without making more money. 

Maximising your savings without increasing your income requires taking a tax efficient approach that minimises your tax burden. 

In this guide to tax efficiency, I explain what it means to be tax efficient and give a few of the most accessible ways anyone can become more tax efficient.

What does ‘tax efficient’ mean?

Being tax efficient is about taking a strategic approach to your personal finances which allows you to minimise your tax liability. In other words, saving and investing in a tax efficient way allows you to generate tax-free income or legally reduce the amount of tax you pay. 

Essentially, becoming more tax efficient means you retain a larger portion of your hard-earned income. 

Improving your tax efficiency relies on informing yourself about the tax-free saving and investment options available to you. Aside from the complexity that is often baked into financial concepts, one reason finance can seem intimidating is because there are thousands of saving and investing products to choose from. 

In the interests of making this guide accessible to as many people as possible, I’m giving details on the most straightforward ways UK earners can maximise their savings and become more tax efficient.

How to be tax efficient in the UK

In the UK we have one of the world’s most developed financial systems. This means there are plenty of ways you can go about becoming more tax efficient. 

This guide is focused on 3 of the most accessible tax-free allowances; ISAs, pension contributions, and saving with the NS&I.   

1. Take advantage of ISAs

Individual Savings Accounts or ‘ISAs’ can be used to save (Cash ISA) or invest (Stocks and Shares ISA) in a tax efficient way. There is an annual allowance that can be invested either into an individual ISA or a combination of ISAs. For the 2023/24 tax year, the ISA allowance remains set at £20,000.

ISAs are a tax efficient way to save as the proceeds of your saving or investment in an ISAs is tax free. This means any interest or dividends earned from a Cash ISA is exempt from income tax, and no Capital Gains Tax is charged on the profits earned from a Stocks and Shares ISA. 

As well as the two categories of ISA (Cash or Stocks & Shares), there are four types of ISA.

The types of ISAs available in the UK include:

Lifetime ISA

Lifetime ISAs are designed for savers between the ages of 18 and 40 and, as the name suggests, this is a longer-term savings account. Lifetime ISAs allow you to pay in a maximum of £4,000 in each tax year. The Government then pays a bonus of 25% up to a limit of £1,000.

Junior ISA

Open to children under the age of 18 who are living in the UK, Junior ISAs are a tax efficient way to save money on behalf of your children. The Junior ISA allowance for 2023/24 is set at £9,000 and the money can come from either family or friends.    

Flexible ISA

Flexible ISAs differ from the other types of ISA as they allow the holder to withdraw and replace the money held in the ISA, without affecting the annual ISA allowance. Keep in mind that any withdrawals and top-ups must be completed within the same tax year.

Innovative Finance ISA

The Innovative Finance ISA entails more risk than the other types of ISA. Innovative Finance ISAs work by allowing you to lend your savings via peer-to-peer lending platforms. The interest earned on your lending is tax free.

2. Tax efficient pension contributions

Here in the UK, the Government incentivises saving for retirement by providing tax relief on pension contributions. Making strategic pension contributions is therefore a great way to maximise your savings in a tax efficient way.

Maximise personal pension contributions

UK earners under the age of 75 are entitled to tax relief on contributions to registered pension schemes. For most taxpayers, the tax relief on contributions to personal pension schemes is limited to an annual allowance. For the 2023/24 tax year, the annual allowance is set at £60,000. 

Aim to max out your contributions so as to reduce your taxable income. This includes staying enrolled with employer-sponsored pension schemes, where you can benefit from both employer contributions and tax relief on your own contributions. 

Timing your pension contributions

Keeping on top of your pension contributions can help ensure you get as close to the annual allowance as possible. It therefore makes sense to consider the timing of your contributions. Spreading your contributions over the course of the tax year is tax efficient as it helps ensure you can benefit from the annual allowance. 

This way, when it comes to the end of the tax year you can make a contribution to cover as much of your unused annual allowance as possible.

3. Save and invest with the NS&I

National Savings and Investments, known as NS&I, is a government savings bank that offers various saving and investment products to the UK public. The savings products offered by NS&I are not always available and are affected by changes in tax regulations.

The most tax-efficient way to save with NS&I is by investing in Premium Bonds.

Premium bonds

By far the most popular savings product offered by NS&I, Premium Bonds promise all holders the chance to win a tax-free cash prize on a monthly basis. Currently, Premium Bonds offer a minimum prize fund rate of 4.65%. 

Considering the combination of interest and the prize fund, Premium Bonds have been described as a cross between a savings account and the lottery. However, Premium Bonds differ from traditional lotteries as you never lose your stake. 

The cash prizes up for grabs through Premium Bonds aren’t just tax free, they are potentially life-changing —NS&I claim that two new millionaires are created each month through Premium Bonds.

Consider seeking financial advice

I started this blog after I started taking steps towards improving my own financial literacy. Although I still favour discovering new ways of earning more money, it’s clear that following tax efficient strategies allows you to increase your savings without the need to increase your income. 

I’d therefore argue that being tax efficient enables you to move towards your saving goals in a largely stress-free way. But before you rush off to put your money into ISAs or Premium Bonds, keep in mind that coming up with the most tax efficient strategy depends on individual factors, like your current tax bracket, saving goals, risk tolerance, and time horizon.

Certain financial products may not be suitable for everyone, so I urge you to consider speaking with an established financial advisor or accountant who can give you personalised tax advice. If you’re based in Yorkshire like me and would prefer hassle-free accountancy and tax services, I recommend the services of UMW Accountants.