The importance of tax wrappers and how to use them
Personal tax thresholds have been frozen since April 2021, with one of the measures announced in the recent Autumn Budget extending this freeze until April 2031 – a further three years than previously planned.
Exactly how you structure your savings and investments can make a real difference to the long-term growth of your wealth – and one of the most effective ways to do this is by using tax wrappers.
What are tax wrappers?
A tax wrapper provides a way to protect your money from different types of taxes. It’s a financial structure such as an ISA or pension that allows your savings or investments to grow more efficiently by reducing or deferring tax.
Why tax wrappers matter
The less tax you pay on your returns, the faster your money can potentially grow — a key benefit of compounding. Over time, even modest tax savings can have a major impact on the end value of your investments.
With personal tax and National Insurance thresholds frozen for a further three years from 2028-29 to 2030-31as announced in November’s Autumn Budget, more than 1.7 million workers are predicted to be dragged into either paying tax for the first time or pushed into a higher band (a phenomenon known as ‘fiscal drag’). That’s why it’s crucial to review where your money sits.
Using tax wrappers such as ISAs and pensions helps protect more of your savings and investments from this creeping tax pressure. By keeping returns tax-free (in an ISA or pension) or gaining tax relief and tax-efficient growth (in a pension), you reduce how much of your income and investment growth is exposed to tax over time.
Common tax wrappers explained
ISAs
Individual Savings Accounts (ISAs) are one of the simplest and most flexible tax wrappers. You can invest up to £20,000 for the 2025/26 tax year (this is lower for a Lifetime ISA at £4,000) and any interest, dividends, or gains are free from UK tax, with withdrawals also being tax-free.
From 6th April 2027, the annual ISA cash limit will be set at £12,000 for those under 65, with those aged over 65 retaining the full £20,000 cash allowance. Annual subscription limits will remain at £20,000 for ISAs in total, with the Lifetime ISA, Junior ISA and Child Trust Fund limits remaining unchanged.
You do not pay tax on interest on cash in an ISA or Income Tax or Capital Gains Tax from investments in an ISA.
The main types include:
- Cash ISAs: Simple savings accounts with tax-free interest.
- Stocks & Shares ISAs: Investment accounts that can grow your money over time.
- Lifetime ISAs (LISAs): Designed to help first-time buyers or boost retirement savings (subscriptions are permitted up to age 50 with restrictions on withdrawals.). The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.
- Innovative Finance ISAs: Peer-to-peer lending investments.
You can also withdraw from and re-deposit funds, without it counting as a new contribution, as long as it’s within the same tax year. This is known as a Flexible ISA.
It was revealed in the Autumn Budget policy paper that the government will publish a consultation in early 2026 on the implementation of a new, simpler ISA product to replace the Lifetime ISA and to support first-time buyers to buy a home.
Pensions
When it comes to planning for retirement, choosing the right investment strategy is crucial and a pension is one of the most powerful long-term tax wrappers.
One option you could consider to potentially help reach your goals sooner would be to add any extra disposable money into your pension.
When you pay into a pension, the government adds tax relief — effectively giving you a top-up based on your income tax rate:
- 20% for basic-rate taxpayers
- 40% for higher-rate taxpayers
- 45% for additional-rate taxpayers
Higher-rate and additional-rate taxpayers need to claim their relief via their tax returns.
Growth within a pension is tax-free, and you can usually take up to 25% of your pension fund tax-free from age 55 (rising to 57 in 2028). Any remaining withdrawals are taxed at your marginal rate.
The annual allowance is currently £60,000 or 100% of your relevant UK earnings (whichever is lower),5 though this may be lower again for higher earners under the tapered allowance.
Alongside personal pensions, workplace pensions are a key part of this system and provide additional advantages many savers overlook, including:
- Employer contributions
- Tax relief is automatically added
- Salary sacrifice options available
- Long-term growth in a protected environment
While investing does give you more potential for growth, good performance is never guaranteed. Investing typically involves more risk than saving, as your money is exposed to the volatility of the markets you invest in.
You’ll also be able to check your State Pension forecast when you start preparing your finances for retirement to see how much you are likely to receive and when you can start claiming it.
The State Pension is a vital component of retirement income for many in the UK. Currently, the full new State Pension is £230.25 per week for the 2025/26 tax year, although the exact amount depends on your National Insurance contributions over your working life. The State Pension age is currently 66 for both men and women, but it is set to increase to 67 between April 2026 and April 2028.
From 6th April 2026, the basic and new State Pension will increase by 4.8% as a result of the triple lock system.
New State Pension from April 2026
- Annual rate: Approximately £12,548
- Pensioners on the full new State Pension will receive an extra £575 a year from April 2026, depending on their entitlement
Basic State Pension from April 2026
- Annual rate: Approximately £9,615
- Pensioners on the basic State Pension will receive an extra £439 a year from April 2026, depending on their entitlement
How to use tax wrappers effectively
- Maximise your allowances each year– Make full use of your ISA and pension allowances before the end of the tax year. Even small regular contributions add up over time.
- Diversify between wrappers– Spread your savings across ISAs, pensions, and other structures depending on your goals
- Review regularly– Tax rules and allowances can change. Regular reviews with your financial adviser help keep your plan tax-efficient and aligned with your objectives.
Avoiding pitfalls
- Stay within contribution limits– Exceeding your ISA or pension allowance can result in tax charges, so it’s important to plan ahead.
- Consider access and flexibility– While pensions offer great tax benefits, your money is locked in until at least age 55 (57 from 2028). Ensure you keep enough flexibility in other accounts for shorter-term needs.
- Don’t neglect reviews– Tax and investment strategies shouldn’t be set and forgotten. Ongoing planning helps you adapt to changes in your income, goals, or legislation.
Trusts and estate planning
Trusts allow you to place assets under the control of appointed trustees, who look after them on behalf of chosen beneficiaries. They can also help you manage and pass on wealth efficiently.
While they can be used during your lifetime or written into a Will, trusts are typically used to achieve one or more of the following:
- Protect family wealth – Trusts can ring-fence assets for children or grandchildren, ensuring they’re managed responsibly until the right time.
- Control how and when assets are accessed – You can specify how funds should be used, such as for education, buying a home, or general support.
- Reduce the impact of Inheritance Tax (IHT) – Depending on the type of trust, assets placed into a trust may fall outside your estate for IHT purposes after certain timeframes (such as the seven-year rule for some lifetime trusts).
Although trusts can be useful for Inheritance Tax planning, it can be a very complicated area with lots of different types of trusts and rules associated with each. It would be advised to speak to a professional adviser for guidance that is best suited to your unique circumstances.
Other wrappers
Investment bonds, Junior ISAs, and Venture Capital Trusts (VCTs) or Enterprise Investment Schemes (EIS) also offer varying levels of tax efficiency, often suited to specific needs or higher-risk strategies.
Building tax-efficient wealth
Tax wrappers are one of the most effective tools for protecting and growing your wealth. By making full use of allowances, diversifying across wrappers, and reviewing your plan regularly, you can reduce unnecessary tax and potentially keep more of your money invested for the future.
If you’d like help reviewing your tax-efficient strategy, speak to your financial adviser to ensure your savings and investments are working as hard as possible for you.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. This material is not a personal recommendation or financial advice and the investments referred to may not be suitable for all investors.
Tax is subject to an individual’s personal circumstances and tax rules can change at any time.
You should ensure your contribution does not result in your total ISA contributions within the tax year exceeding £20,000. ISA eligibility and tax rules apply.
Pension eligibility and tax rules apply. You should ensure your contribution does not result in your total Pension contribution within the tax year exceeding £60,000 or 100% of your earnings, whichever is lower.
True Potential Wealth Management is authorised and regulated by the Financial Conduct Authority. FRN 529810. Registered in England and Wales as a Limited Liability Partnership No. OC356611.
True Potential Investments LLP is authorised and regulated by the Financial Conduct Authority. FRN 527444. Registered in England and Wales as a Limited Liability Partnership No. OC356027.
True Potential LLP is registered in England and Wales as a Limited Liability Partnership No. OC380771.
