Whether you’re growing your money by investing it in the stock market or earning interest in a savings account, you may have to pay tax on the gains you make. But if you want to keep as much of your profits as possible, this is where tax wrappers come into play.
So, what is a tax wrapper? They may sound complicated, but they’re actually pretty simple to use. In fact, all you need to do is deposit money into them to reap their tax-free benefits.
Keep reading to learn about the different types of tax wrappers and how to make the most of them.
What is a tax wrapper?
Tax wrappers are legal ways to earn interest on your savings, or profits from investments, without being taxed on the gains you make.
These accounts essentially ‘wrap’ around your savings and investments, shielding them from the likes of Capital Gains Tax, as well as other tax on investments and savings.
Plus, they can also be used to reduce your tax on pensions, too.
A good way to think of them are as tax breaks from the government that could help you to achieve your financial goals sooner.
1. The main types of tax wrappers
There are a few different types of tax wrappers you can use to build your wealth, with the two most popular being ISAs (which are available for you and your children), and pensions.
These are all products that we offer here at Wealthify, and we’ll go into more detail on them below.
Other tax wrappers you could use to invest are Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) – but we don’t personally provide these products.
2. ISAs and Junior ISAs are tax-free
ISAs (Individual Savings Accounts) are a tax wrapper specifically for savings and investments.
With these savings or investment accounts, you can give any money you pay in the chance to grow tax-free – whether this is in the form of interest, dividends, or profits from selling your investments at a higher price than you bought them for (these are classed as ‘capital gains’).
This means that when it comes to ISAs and Capital Gains Tax (for example), you won’t have to pay this if you use one to invest.
And the reason ISAs are tax-free? All UK residents get an annual ISA Allowance, which is currently £20,000 for the ({{TaxYear}} tax year. And it’s up to you if you use this in one ISA or spread it across a few different ones.
There are four different types of ISAs available for adults:
- Cash ISAs: to accrue interest on your cash savings.
- Stocks and Shares ISAs: to give your money the chance to make a profit by investing it.
- Innovative Finance ISAs: to provide loans to approved individuals and companies, which will allow you to earn a fixed amount of interest on this over a set period.
- Lifetime ISAs: to build up money to buy your first property or fund your retirement (which could be in the form of cash savings or investments).
There are also Junior ISAs if you want to build a nest egg for your little ones, too. 
With this tax wrapper, there are only two types available (Junior Cash ISAs and Junior Stocks and Shares ISAs), and the allowance (which can be split between them) is currently £9,000 per child, per tax year.
Do you pay tax on ISA withdrawals?
No – you don’t have to pay tax on ISA withdrawals. So, if you have wondered, “how much can you take out of an ISA tax-free?” the simple answer is: as much as you want!
Because the gains you make in ISAs are completely tax-free, you won’t have to pay anything when you withdraw – unless you choose an ISA provider that charges fees to do this, or to transfer out.
At Wealthify, there are no fees if you want to withdraw or transfer your ISA to a different provider.
Additionally, some ISAs – like our Cash ISA and Stocks and Shares ISA – are flexible, which means you can withdraw and replace funds within the same tax year without impacting your allowance.
However, some providers may have limits on when or how often you can withdraw, while others will let you take money out whenever you fancy. But do be aware of the following timeframes:
- With a Stocks and Shares ISA, you’ll need to sell your investments first – this can take up to 10 working days if you have a Wealthify ISA.
- With an Innovative Finance ISA, you may have to wait for another investor to buy you out of your loan – which could take days, weeks, or months.1
And when it comes to withdrawals, different rules will also apply for Lifetime ISAs and Junior ISAs:
- With a Lifetime ISA, if you withdraw before 60 or you don’t use the money to purchase your first home (at any age), you’ll pay a 25% withdrawal charge.
- With Junior ISAs, any money paid in belongs to the child, so only they can withdraw it – but they won’t be able to until their 18th birthday.
In a nutshell: when it comes ISAs and Capital Gains Tax, as well as any other tax on savings and investment gains (like income tax), they’re not something you need to worry about.
3. SIPPs are tax-efficient
In the UK, there are three types of pensions to help you pay for your future retirement – which are:
- The State Pension: this is funded by the government, and how much you get is based on how many years’ worth of National Insurance contributions you’ve made.
- Workplace pensions: if eligible, you’ll be automatically enrolled into the scheme by your employer when you start a new job, and you’ll both contribute to it.
- Personal pensions: also called a Self-Invested Personal Pension or SIPP, this is a pension that you set up yourself and can pay in alongside your workplace pension.
If you (and your employer) are currently putting money into your workplace pension, good news – you’re already benefitting from not paying tax on pension contributions.
But did you know that SIPPs are another great tax wrapper you could be missing out on?
This is because you’ll get an instant tax-relief top-up from the government on any money you pay in (if you’re a
basic rate taxpayer). This is worth 25% – so, for every £80 you pay in, the government will add another £20, bringing your contribution up to £100.
But do keep in mind that although there are no limits on how much you can put in pensions, each year, you’ll only get tax relief on £60,000, or 100% of your salary – whichever is lowest.
And like an ISA, you’ll pay no income tax or Capital Gains Tax on your money as it grows.
Here are some other benefits of using a Wealthify Personal Pension to save for your retirement:
- You can set-up a monthly Direct Debit or just pay in as and when it suits you.
- You can top-up with as little or as much as you want (from a minimum of £50*).
- You can transfer your old workplace pensions in to keep better track of them.
*A minimum initial deposit of £500 is required to open a Wealthify Pension.
And when it comes to withdrawing, if you have a defined contribution pension (like a SIPP or some workplace pensions), you may be able to take 25% of your pot tax-free when you’re old enough to do so. This is generally at age 55, but will be changing to 57 from April 2028.2
The remaining funds left in your pot will be subject to income tax when you withdraw it – so there will always be some tax on pensions that you’ll need to pay when you retire.
Do I pay tax on my State Pension?
Yes, you may have to pay tax on your State Pension as it’s subject to income tax – in the same way that your salary from your job, or gains you make from savings and investments are.
This is because all of the above are classed as ‘earnings’ by HMRC.
However, the full State Pension amount currently falls under the income tax threshold (which is how much you can earn tax-free per year and is £12,570) for {{TaxYear}}).
This means you’ll only be taxed if your State Pension and other earnings go over this.
4. Different allowances apply to tax wrappers
Although all tax wrappers will help you keep more of your gains as your money grows, they all have different allowances you’ll need to stick to.
Here are the current ones to be aware of for the {{TaxYear}} tax year:
5. How to pick the right tax wrapper for you
If you’re not sure which tax wrapper is best for you, a key thing to consider is what you want to do with the money once it grows.
If you’re happy for the money to be locked away until you retire, then a Personal Pension could be a good option for you. However, an ISA might be a better choice if there’s a chance you’ll want to use it sooner.
Just make sure you take the following into consideration:
- You’ll have to pay a 25% penalty if f you withdraw from a Lifetime ISA early.
- Investing (such as through a Stocks and Shares ISA) is something you do for the long-term (at least 5 years) – this is because the performance of financial markets can go up and down, so this could give your investments more time to recover from dips.
If you want to save for your child, then a Junior ISA is the obvious choice – but again, anything you pay in is locked away until they turn 18. And because the money becomes theirs as soon as it hits their account, only they will be able to access it.
Ultimately, tax wrappers aren’t a “one or the other” kind of deal; they all have different purposes. This means you could use various accounts to work towards a range of financial goals !
However, do remember that tax treatments depend on your individual circumstances, and they may be subject to change in the future.
Take advantage of tax wrappers with Wealthify
As we’ve already mentioned, we offer a variety of different tax wrappers to help you keep more of your money as it grows.
So, whether you’re looking for a Stocks and Shares ISA to make profits from investing, a Cash ISA to earn interest on your savings, a Personal Pension to boost your retirement fund, or a Junior ISA to build a nest egg for your child to reach their future goals, we have you covered.
Wealthify does not provide advice. If you’re not sure whether investing is right for you, please speak to a financial adviser.
With investing your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.
ISA rules apply. Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
