Can’t fit all your investments into your ISAs and SIPPs? Then you’ll reduce your tax bill by following the first rule of tax-efficient investing:

Squeeze the most heavily taxed investments into your tax shelters first.

Happily, the pecking order for maximum tax efficiency is clear cut for most people.

Tax-efficient investing priority list

Shelter your assets in this order:

• Non-reporting offshore funds
• Bond funds, money market funds, UK REITs and PIAFs
• Individual bonds
• Income-producing equities
• Foreign equities (arguable)

To see why this sequence is tax efficient, let’s just tee up the relevant tax rates:

2025/26	Income tax	Dividend tax	Capital Gains Tax
Tax-free allowance	£12,570	£500	£3,000
Basic rate taxpayer	20%	8.75%	18%
Higher rate taxpayer	40%	33.75%	24%
Additional rate taxpayer	45%	39.35%	24%

Dividend income tax will rise to 10.75% (basic rate) and 35.75% (higher rate) from 6 April 2026. The additional rate remains unchanged.

From 6 April 2027, tax on savings income – as paid by money market, treasury bills, and bond funds – rises to 22%, 42%, and 47% for basic, higher, and additional rate tax-payers respectively. The same rate will also apply to property income from 6 April 2027. This is payable by UK REITs and PIAFs but not ordinary REIT tracker funds.)

At a glance we can see that income tax is the nastiest while capital gains tax (CGT) is generally the most benign. Your CGT burden can also be reduced by offsetting gains against losses.

So the plan is to shelter investments that are liable to income tax first, dividend tax second, and CGT third.

A few tax efficiency caveats to consider

Before we get into the guts of it, I’ve got to dish up some caveat pie:

• Interest is taxed at your usual income tax rate until 6 April 2027. Basic-rate payers have a £1,000 personal savings allowance, reduced to £500 for higher-rate payers and nil pounds beyond that.

• A few very low earners qualify for an additional band of tax relief on savings. Up to £5,000 of interest can be sheltered under the ‘Starting Rate for Savings’.

• If your interest, dividend income, or capital gains pushes you into a higher tax band then you will pay a higher rate of tax on the protruding part.

• In that situation, it matters what order you’re taxed in, so you can make the most of your tax-free allowances. The UK order of taxation is: non-savings income, savings income, dividend income, and finally capital gains.

• If you’d like a quick refresher on the tax-deflecting powers of ISAs and SIPPs, just click on those links.

• And if you’re not sure which is best for saving then try our take on the ISA vs SIPP debate. Most people should probably diversify across both tax-efficient investing shelters. But there are a some important wrinkles to think about.

Let’s now look in more detail at – all things being equal – the best order of sheltering assets for tax-efficient investing, starting at the top.

Non-reporting offshore funds

Offshore funds that do not have reporting fund status are taxed on capital gains at income tax rates. And as you can see from the table above, that’s a hefty tax smackdown.

Worse still, your capital gains allowance and offsetting losses are knocked out of your hands by HMRC like the school bully taking your lollipop.

If your offshore fund or exchange-traded product (ETP) doesn’t trumpet its reporting status on its factsheet then it probably falls foul.

It’s worth double-checking HMRC’s list of reporting funds. Many offshore funds / ETPs available to UK investors don’t qualify. Also, it’s possible for a reporting fund to lose its special status.

Any fund that isn’t domiciled in the UK counts as an offshore fund. (Sometimes it’s worth saying the obvious!)

Bond and money market funds

Money market funds, bond funds, and even treasury bills are next into the tax bunker because interest payments are taxed at income tax rates rather than as dividends. (And on the higher ‘savings income tax’ rates from 6 April 2027.)

Any vehicle that has over 60% of its assets in fixed income or cash at any point in its accounting year falls into this category.

However, because these distributions count as savings income, interest payments are also protected by your Personal Savings Allowance (and even the Starting Rate for Savings).

Bond fund capital gains fall under capital gains tax, naturally.

Money market funds typically achieve at most miserly capital gains.

Treasury bills count as deeply discounted securities. Essentially they’re designed to make a capital gain rather than pay interest. But the capital gain counts as savings income.

Our Treasury bill article explains the weirdness.

Starting Rate for Savings – bonus protection

Some people – most likely retirees – can find themselves with low earnings income but reasonable savings income.

Such savings income can be sheltered by the Starting Rate for Savings.

Savings income that sits in a £5,000 band beyond your Personal Allowance may qualify for a 0% rate of income tax thanks to the Starting Rate for Savings rules.

That’s most likely to happen if your non-savings income plus savings income lands somewhere between £12,570 and £17,570.

(The upper limit can be increased if you’re eligible for additional tax-free allowances.)

Beware that every pound you earn (in non-savings income) over £12,570 shaves £1 from your £5,000 Starting Rate for Savings allowance.

So if you earn over £17,570 in non-savings income then you won’t get any Starting Rate for Savings privileges.

Whereas, £14,000 in non-savings income leaves you with another £3,570 in savings income that can be protected using your Starting Rate for Savings.

Any savings income that can’t huddle behind the Starting Rate for Savings barricade can still duck under the Personal Savings Allowance.

All this begs the question: what counts as earnings income?

The main categories are:

• Income from work, whether employed or self-employed
• Pension withdrawals including the State Pension
• Retirement annuities
• Rents
• Taxable benefits

It’s obviously less urgent to get all your bonds into your ISAs and SIPPs if you can earn interest tax-free via the Starting Rate for Savings and Personal Savings Allowance routes.

As mentioned though, bonds can make capital gains. Long to intermediate maturity bond funds are most likely to land you with a significant CGT bill whereas short bonds tend to be more cash-like.

UK Real Estate Investment Trusts (REITs) / PIAFs

UK REITs and PIAFs pay some of their distributions as Property Income Distributions (PIDs).

PIDs are taxed at income tax rates not as dividends. UK REITs and PIAFs will pay higher property income tax rates from 6 April 2027. Those rates will be 22%, 42%, and 47% for basic, higher, and additional rate tax-payers respectively.

Get them under cover for optimal tax-efficient investing. PIDs are paid net so make sure you claim back any tax due if you tax shelter ’em.

REIT tracker funds and ETFs distributions are liable to the standard dividend income tax rate, not the higher property income tax rate.

Individual bonds

Individual bonds are liable for income tax on interest – just like bond funds.

The only reason that bonds are slightly further down the list is because individual gilts and qualifying corporate bonds are not liable for capital gains tax.

We’ve previously delved into the differences between how bonds and bond funds are taxed.

There are also some particularly intriguing low coupon gilts on the market that pay very little interest. Instead, their future cashflows are heavily skewed towards capital gains – which are tax-free.

They’re worth a look if you’re comfortable with buying individual gilts and would like to reduce your tax bill.

Income-producing equities

The dividend tax situation has got a lot worse for UK investors in recent years, so high-yielding shares and funds should duck under your tax testudo next.

By all means prioritise protection for your growth shares if you think CGT is the bigger problem.

But bear in mind you can still defuse capital gains every year – although this mitigation measure is being steadily eroded by the shrinking capital gains allowance – and you can usually defer a sale.

Foreign equities

It isn’t necessarily a priority to get overseas funds and equities sheltered, but there’s a tax-saving wrinkle here that only works with SIPPs.

The issue is withholding tax, which is levied by foreign tax services on dividends and interest you repatriate from abroad.

Sometimes withholding tax will be refunded as long as you fill in the right forms. For example a 30% tax chomp on distributions from US equities becomes a mere 15% if your broker has the appropriate paperwork.

Foreign investments in SIPPs can often have all withholding tax refunded but only if your broker is on the ball (and the appropriate agreements are in place). You’d need to check. ISAs don’t share this feature.

If you hold foreign equities outside of a tax shelter then you can use whatever withholding tax you have paid to reduce your UK dividend bill.

So in the case of US equities, a basic-rate taxpayer could use the 15% they’ve paid in the US to reduce their 7.5% HMRC liability to zero.

In other words, only higher-rate / additional-rate taxpayers should consider sheltering US equities in ISAs from a dividend perspective. (There’s still capital gains tax to think about in the long-term, remember.)

Everyone can benefit from the SIPP trick though.

Bow-wowing out

It only remains to say that this is generalised guidance and tax is a byzantine affair. Please check your personal circumstances.

Tax efficiency is important but whatever happens don’t let the tax tail wag your investment dog.

Take it steady,

The Accumulator

Note: This article on tax-efficient investing has been given a tidy up after a few years out in the pastures. Comments below might refer to previous tax rates and allowances. So do check the date they were posted!

What caught my eye this week.

Passive investors who’ve fretted about the trend for companies to grow into giants outside of the public markets might soon have a new beef with these mega-caps.

The likes of SpaceX, Stripe, OpenAI, and many more have created hundreds of billions of dollars – perhaps in SpaceX’s case over $1 trillion – of shareholder value, without deigning to raise any money the old-fashioned way via an IPO and the public markets.

Employees have become millionaires and some VCs have made fortunes. But the average investor has missed out on such wealth creation over the past decade or so.

Online platforms and software firms found that in the cloud computing era they had little need for money upfront to support their growth anyway. Very different to yesteryear, when growing firms had to build factories or dig mines.

But even the companies that did need to spend big – such as SpaceX and OpenAI – have been able to tap into vast pools of private money. This way they could keep expanding without the burden of public scrutiny or a volatile share price.

Good for them, though I’ve mused before about the threat this poses to public equity markets as the democratic wealth creation engines we’ve enjoyed for 100 years.

Whale sharks

Some of the biggest and best-known AI-related start-ups of the day are finally expected to list in the US this year, however, thanks to the voracious capital requirements of the AI infrastructure rollout.

But if you’re a passive investor in the S&P 500, you might end up wishing they hadn’t.

As venture capitalist Tomasz Tunguz highlights, these firms have gotten so big before going public that it’s not clear how the market will find the money to take a stake:

Tunguz notes:

At standard float percentages, these three companies would need to raise $432-576b from public markets in a single quarter.

From 2016 to 2025, the entire US IPO market raised $469b.

It’s like throwing a boulder into a pond. Standard floats are impossible, so these companies will debut with tiny ones, likely 3-8%.

I don’t feel I’m qualified to opine on what exactly will happen when a $1 trillion company tries to become the sixth-largest company on the public markets in a morning.

But I know the process wasn’t meant to work this way.

Supermassive

Incidentally, some people also worry that all the potential value has already been created by these companies, because they’ve gone public so late. Hence public market investors buying into them now are doing the equivalent of securing shares in Lastminute.com on the eve of the Dotcom crash.

That’s obviously tautologically true. If SpaceX had floated 20 years ago at $1bn, say, then US small-cap index returns for the past couple of decades would be in far better health.

But it’s also true that the biggest companies in the US will probably be bigger than $10 trillion by the 2040s. There may yet be scope for some further multi-bagging.

Especially if, you know, AI ends up taking over all the work of every other business on the market…

Have a great weekend.

[continue reading…]

A German lift manufacturer was quoted in the Financial Times this week talking about future sources of demand for its products:

“As populations age – and that’s happening in Europe, it’s going to happen in China, everywhere else – there’s a need to put in elevators,” Uday Yadav, chief executive of German firm TK Elevator, told the FT.

“We see that becoming an increasing trend . . . it’s early days, but it’s starting to happen,” he said, pointing to Japan as an example of a country where the process of demographic change was already advanced.

This was an interesting little read to me for a few reasons.

Firstly, I lost a micro-bet with myself. When I clicked through from social media I thought the story would be about Kone, one of the largest lift manufacturers in the world. Kone is a company I’ve run into before when I was a shareholder of a tiny maker of lift buttons called Dewhurst, which de-listed last year. ¹

Never mind – just having this latticework of many hundreds of companies in my head is one of the more esoteric pleasures I get from being an active investor.

The story also added to my sense of the world getting older and more infirm.

This should help me pick stocks. Maybe I’ll pay a smidgeon more attention to a drugmaker talking about an arthritis remedy, or a homebuilder targeting the over-65s with bespoke retirement communities.

But I’d argue it also helps me appreciate where we’re headed as a society, and so informs me as a citizen.

Actively engaged

Clearly you don’t need to read the financial press or company reports to understand trends like aging.

Non-investing-obsessed people make do with news stories and programmes, what they hear from others, and perhaps the odd non-fiction book.

However I do think there’s a particular quality that comes from putting your money where your curiosity and engagement moves you.

Unlike so-called ‘armchair quarterbacking’, being an armchair investor always brings with it the risk of a financial loss.

But beyond that obvious pain – or gain – there’s a secondary scorekeeping element to it that pushes back hard against the self-delusion we’re all prone to.

Red pill investing

We believe at Monevator that most people should be passive investors.

That’s because beating the market through judicious stock picking or tactical allocation has been shown to be a fool’s errand for most underperforming fund managers, let alone us amateur investors.

Nevertheless some of us do invest actively, for our sins.

And to me, one of my rare points of difference with my co-blogger The Accumulator is how it feels like being too passive by contrast can drain the colour – and even some of the underlying truths – from investing.

I’m thinking here of long passive pieces that talk about how ‘equities’ delivered this or that return over some time period – and how they performed versus other assets – without even the merest nod as to what the label represents.

I’d argue that when, in contrast, you always think of equities as so many companies competing in a capitalist system, then you always know you’re betting on human innovation, personal ambition, and risk-taking even when you put money into, say, an S&P 500 tracker.

Similarly, once you’ve traded individual bonds of varied coupons and maturities, you will forever see them as explicit I.O.U.s with particular obligations and an expiration date. Not just as building blocks with a certain risk/return profile.

Which in turn means you needn’t consult the historical data to grasp they’ll be smashed by higher inflation, say.

Or at least you’ll not be shocked when that happens.

Unaware investors

I have met people over the years with high six-figure sums invested in funds who cannot tell me what equities – or even ‘shares’ – are, let alone bonds.

Score one for modern civilisation. Such people can now invest into and get rich from equities without a whiff of cosplaying a bloke in tights betting on the East India Trading Company in a 1690s coffee shop.

All the same, you will struggle to convince me they are as excited about investing – or as engaged with the capitalist society they live in – simply on account of their owning a tracker fund.

Indeed the capitalism bit has been neatly packaged away. A Guardian editorial bemoaning ‘the threat’ from capitalism to pensions would be one quintessential result.

Foreseeing a non-financial return

That’s enough mild inter-factional shade for now. (Come on, don’t be like that…you passive investors have the run of the place on Monevator, with us diehard stockpickers left to do our thing on Moguls. Be magnanimous in victory!)

Let’s return to how active investing can help you see where society is headed.

Here are a few things where I feel investing got me up to speed ahead of my friends.

The death of physical media

I encountered Netflix as a US stock around 2008 or 2009, well before its launch in the UK. A few years before that I’d sold my several hundred CDs (most gathered as freebies as a student music reviewer) for proper money, having watched the likes of EMI struggle with online piracy. Shortly afterwards most of those CDs were worthless.

Weight-loss drugs

Reading the excitement around GLP-1 trials from the likes of Novo Nordisk suggested these would be huge years before Joe Public heard of them. Even a few years ago I was still telling some oblivious UK healthcare professionals about them. Following these drugs also hints at a tougher future for junk food manufacturers and booze companies. That’s yet to play out for sure, though.

Software eating the world

Where to start? The heady growth of innumerable software firms and tech platforms over the past three decades showed the trend to investors long before most other folk had got passed Microsoft’s Word, Excel, and Internet Explorer. An especially interesting case is Amazon’s AWS service. When Amazon started offering on-demand cloud computing infrastructure a few years after the dotcom crash, I could see that big in-house office IT departments were in trouble.

Influencer economy

Nearly a decade ago I put money into two consumer startups whose pitches centred around social media. Not just keeping their corporate profiles updated, but designing and curating products and spaces to attract influencers and to encourage customers to take and share photos on Instagram. I suddenly realised why some of the hippest eateries in London had installed neon-lit witticisms or art installations that customers would then pose beside. Ten years later we all live in that world. (And happily my investments have multi-bagged!)

But perhaps you think these examples are all obvious? Alas such post-hoc normalisation is all too easy.

It’s like when I try to convince my girlfriend that The Beatles were influential. She just hears some catchy but dated pop tunes, and the weird intrusion of a sitar. The Beatles’ impact is there in the later music we hear, but the world was changed and it’s the new normal.

Get a clue

It’s hard to grasp what wasn’t obvious in the past when it’s everywhere today.

But seeing little clouds when they’re still far away on the horizon is exactly what I’m talking about.

Not ‘the market’ as a whole sniffing out a technological revolution or societal upheaval. Although it certainly can and does do that. I’m thinking more granularly and earlier in the timeline.

I also don’t want to imply all active investors have a crystal ball – an infallible perspective that shows them tomorrow’s headlines, even if they struggle to profit from it.

On the contrary, it’s easy to recall when hapless active investors who paid heed to R&D spending, earnings transcripts, or grand corporate proclamations would have done better to buy a pack of Tarot cards.

From 3D printing to NFTs to fuel cells, active investors have been led up more garden paths than Alan Titchmarsh.

And let’s not even talk about the metaverse.

Faulty foresight

As a sidebar, the dotcom boom and bust makes for an interesting case study on insights versus outcomes.

Investors then extrapolated a few key technology developments – and a vast amount of spending – into bonkers valuations for still-profitless companies.

The result was a bubble that soared then self-destructed. Yet all the same, our tech-enabled society proved those investors were right-ish all along.

It’ll be interesting to see if today’s mega-splurge on AI proves an historical echo.

Or for a different example of stock market fallibility, think back to Covid.

I’d been tracking the virus ‘for fun’ with some nerdy friends since around Christmas 2019. And I vividly remember an Asia-focussed dinner date telling me about how “All the factories are closed in China” in early February.

I had my mum isolating soon afterwards. I sold a lot of my shares, too – though not enough, given the turmoil that was to come.

Watching the US stock market continue to climb even as Covid case numbers multiplied elsewhere was discombobulating, to say the least.

Yet just a few months – and crash and bounce later – the market went crazy over work-from-home darlings like Zoom, DocuSign, and Peloton. These were the firms of a digital future that Covid had apparently pulled forward a decade.

Only they weren’t. The vaccines came, and now they languish below their peaks.

The loser’s game

So again, I’m not saying there are easy financial wins to be had when it comes to turning insights into a market-beating advantage.

Quite the opposite!

I actually did okay with my investing decisions around the Covid tragedy – including when to buy in again.

But I can equally well recall my thinking the market looked cheap in mid-2007, before the GFC. I invested more into Lloyds for its chunky dividend… Oops!

Certainly just noticing a sector or theme in the news is probably going to lose you money versus the market, unless you’re some kind of wunderkind trader.

Consider the mega-trend ETF investigation The Accumulator conducted a few years ago. In many cases, TA found backing Big Obvious Developments actually saw you lose to the market.

At the very least, by the time a Big Obvious Development has been packaged into an easy-to-trade ETF wrapper, everyone can see it coming and the gains are probably already in the price – and more.

Mirror mirror on the trading wall

By now you might be wondering – since you’re apparently in the presence of an active investing soothsayer – what should we expect to see next?

Fair, and I’m immediately going to hedge and say AI hysteria is largely crowding everything else out. At least in terms of what my little brain can process.

But here’s a few examples that slouch to mind:

• Retailers have been increasingly complaining about (and taking action over) the cost of online returns. I suspect we’ll look back with amazement that you could buy three sizes of the same outfit, keep at most one, and then return the rest for free.
• A lot of companies are talking quantum computing. You can read about this on the BBC website, so the progress is no secret. But money talks louder than puff pieces.
• UK housebuilders are consistently citing a need to unlock the demand they see. I wouldn’t be surprised if the government relaunches a version of Help to Buy soon. Or if the housing market picks up anyway.
• Defence spending may go more towards software and cutting-edge technology (such as AI-driven drones) rather than tanks and guns, judging by what’s currently exciting investors. (Well, US investors. The Europeans like materiel maker Rheinmetall.)
• Choice fatigue. Consumer giants like Unilever and Diageo have stopped buying breakout brands. Instead they are rationalising. We could also be on the cusp of re-bundling, due to a weariness to pay-up for so many streaming services. (The ad-supported subscription plans of Netflix and Disney are another response to this.)

Yes you can also see such things coming if you’re a diehard passive Boglehead.

However it’s necessary (but not sufficient) to stay alert to the changing world as an active investor. Whereas ‘Vanguard and chill’ is a mantra for many passive investors.

Indeed that hands-off approach to investing is a benefit for most, not a bug.

Stakeholder citizens

Once more with feeling: I’m definitely not saying anyone needs to invest actively. Passive investing through index funds is best for most for sure.

I am however flagging up a lesser-noted pleasure of interacting with the world as an active investor.

In some ways it’s like the world’s biggest and best board game. Think Settlers of Catan meets Civilisation meets your financial future.

A while ago I was lucky enough to meet Lord Lee, the famed ‘ISA millionaire’ who loves to invest in dividend-paying UK small-caps companies.

Already in his 70s when I ran into him, Lord Lee’s investing seems to keep him more engaged with the changing world around him. That’s a model for me.

Absolutely it would be patronising to suggest that you must follow the fortunes of AIM-listed small caps in order to continue to care about UK PLC.

But I think it is fair to say that you get few of those engagement benefits if you’re a passive investor. You’ll have to seek your stimulation elsewhere!

Warren Buffett once said: “I am a better investor because I am a businessman and a better businessman because I am an investor.”

I’m sure that’s true. Similarly, I believe I’m a better citizen because I’m an active investor too.

Did active investing ever give you early insights into where the world was going? Let us know in the comments below.

1. Yes Kone is Finnish and the headline states the firm quoted is German. But this clue wasn’t available in the preview I saw![↩]