How to build a tax-efficient investment portfolio

Whether saving a few pounds at the till or scouring websites for the best deals, every penny counts. And that’s also true when building an investment portfolio, which can help you save in a tax-efficient way. 

Tax-efficient investment portfolios minimise your tax spending. This can then enhance your overall returns and the long-term growth of your investment, as less of your money will be eaten by tax. 

There are different savings products available, but their tax efficiency varies.

ISAs

There are six different ISA products:

• Stocks and shares ISA – These ISAs allow you to invest in different stocks and shares. Depending on your provider,  you’ll have different investments you can choose from. These might be individual companies, or it might be a portfolio that’s already been made for you. Remember, the value of investments can go down as well as up, and you may get back less than you've paid in.
• Cash ISA – With a cash ISA, your money is held as exactly that, cash. It will earn interest over time, and that interest will could benefit from compounding.
• Junior ISA (JISA) – These can be opened for those under 18. There are also two products that come under a junior ISA, a stocks and shares JISA, and a cash JISA. You can find out more about JISAs in our article.
• Lifetime ISA (LISA) – LISAs are there to help you save for your first home or your retirement. There are a few restrictions such as, you must be between the ages of 18 and 40 to open one. You will receive a 25% government bonus on your savings for up to a maximum of £1,000 a year. 
• Innovative finance ISA (IFISA) – Instead of investing in stocks and shares or holding your money as cash, these offer you the opportunity to invest in peer-to-peer (P2P) loans. You’re able to give your money in the form of a cash loan to small businesses and individuals. You’ll earn interest over time as the money gets paid back to you. However, these kinds of ISAs can be seen as high risk because they’re not protected by the Financial Services Compensation Scheme (FSCS). So, if the provider collapses, then you won’t be protected. There’s also a chance that the person or business you lent your money to doesn’t pay you back. However, it may be that the IFISA provider has reserves to protect investors in this situation, so this is something to consider if you’re looking into this kind of product. 

It's worth noting with ISAs you'll have a limit on how much you can pay into them every tax year. And this isn’t a product-by-product basis, this limit is across all the ISAs you have. The limit for the 2025/2026 tax year is £20,000 unless you have a lifetime ISA where your annual cap is £4,000. 

ISAs are tax-efficient because you won't have to pay income tax on any dividends or interest, or any capital gains on investment growth. 

Pensions

Pensions provide a way for you to save for your retirement. You might have one with your employer, a private one or maybe even both! You won't have to pay any capital gains tax on any investment growth or any income tax on dividends or interest that the investments earn, but note that any tax benefits may change in the future and will depend on your circumstances. 

To put it simply, you pay into pension pot, your money is invested and will fluctuate overtime because of the stock market, like a stocks and shares ISA. Your pension savings may go down as well as up and you may get back less than you put in. There is also a limit on how much you can pay into your pension, like a ISA. But this will depend on your personal circumstances, so you'll need to double check your annual allowance. You're also not able to take your pension savings until a certain age.

Investment portfolio diversification means you're spreading your money across different risk levels and asset classes. By doing this, you’re spreading your investments to help balance any losses that might happen in a particular area. In other words, if you invest in just one or two companies it may be riskier for your portfolio if they suffer a heavy loss because that may mean you lose money too. But, if you spread your investments across different businesses, it may balance more evenly if one or two aren’t doing well.

Asset location strategies

You can help maximise your savings allowances and tax efficiency by exploring different accounts on offer. Having separate allowances means you could save up to £80,000 (£20,000 ISA allowance and £60,000 pension allowance) every tax year depending on your earnings if you have both pensions and ISAs. But remember that tax benefits will depend on your circumstances and may change in the future.

Tax-loss harvesting

If you have investments that aren't in a tax-efficient product, then tax-loss harvesting can be used to reduce your capital gains tax by selling investments at a loss, which may lower your tax liability. 

To do this you’ll need to:

1. sell your investments that have lost value.
2. use the losses to offset gains from other investments.
3. this then lowers the amount of tax you have to pay on your gains.

For example, it may look something like this:

You made £10,000 on one investment, but you might have lost £10,000 on another. You wouldn’t have to pay any capital gains tax because the gain and the loss cancel each other out. 

You can check whether you might have to pay Capital Gains Tax on your investments by using our Capital Gains Tax calculator.

If you’re surfing the waves of investing, it’s important to regularly review your portfolio. It’s also a great way to make sure you’re staying as tax-efficient as possible.

Seeking professional advice

Getting advice from a professional financial adviser can help you make most of your investment decisions. They might be able to help you work out how much, if any, tax you’ll need to pay. 

If you’ve got pensions or investments worth £150,000 or more, an adviser from the Aviva Financial Advice Team can guide you on all your financial planning options. Any recommendations advisers make will be for products from Aviva and other carefully selected partners. If advice is right for you, the adviser will fully explain the charges before you decide to go ahead with financial advice. So why not get in touch. 

For free, impartial guidance on all money matters, go to unbiased.co.uk.