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‘Don’t put all your eggs in one basket’ is the proverbial wisdom originating from at least 1615.1 We’re familiar with the concept for our investments; spread the risk, seek diversity and create a balanced portfolio.
But have you thought about diversity in terms of tax efficiency too? A method called the ‘four-box principle’ spreads your investments across four tax wrappers. Each has different tax treatment, and when used together, they can enable you to draw a significant amount of tax-efficient income each year in retirement.
The four boxes of tax planning
Here are the four tax wrappers for you to consider:
1) Your pension
Your pension is the cornerstone of your retirement planning – a powerful way to build wealth for the future. Contributions made through your employer’s pension scheme come from pre-tax income, while any contributions you make outside of your employer’s scheme can benefit from up to 45% tax relief depending on your tax band.
Another key advantage is that pensions are free from capital gains tax (CGT), allowing your investments to grow more tax efficiently over time. You can take a 25% tax-free lump sum from the age of 55 (capped at £268,275, with the age to increase to 57 in April 2028). Any further income is taxed at your income tax rate.2
2) An ISA
ISAs remain one of the most straightforward and tax-efficient ways to save and invest. With no tax payable on their growth or on withdrawals, you are limited only by the amount you can pay in each year. The ISA limit for the tax year 2025/26 is £20,000 a year.3
3) An offshore bond
This is where it starts to get interesting. An offshore bond is an investment product offered by insurance companies based outside the UK, often in low-tax jurisdictions. Investments inside the bond can grow largely free of UK tax, with any taxation deferred until money is withdrawn or the bond cashed in.
One of the key benefits is flexibility. You can withdraw up to 5% of your original investment each year without paying tax straight away, with tax only becoming due after 20 years of 5% withdrawals or when the bond is finally cashed in.4
4) A general investment account (GIA)
A GIA is a way of investing in shares, funds and other investments. Any dividends received are subject to dividend rates of income tax, and any interest earned is taxed as savings income – though you do benefit from annual allowances of £500 or £1,000 depending on your tax band. Profits made are liable to CGT, but you can use your CGT allowance, which for 2025/26 is £3,000. That means up to £3,000 of gains per year can be taken tax free.
The ‘four box’ principle in practice
The real magic comes in having the full combination of the four tax wrappers. A case study of a couple, Mike and Judy, best demonstrates how this can work.
They have worked with a financial adviser over the years to invest £2 million using this four-box principle. We’re making assumptions here that our couple are UK residents with standard allowances and that the investment and income is projected to be suitable based on their age, lifestyle and goals. Of course, this is an example, rather than advice.
Their target yearly income is £100,000.
| The four tax wrappers | Sum held | Strategy | Annual withdrawal | Tax impact | |
|---|---|---|---|---|---|
| 1. Pensions | £502,800 | Each use £12,570 personal allowance | £25,140 | Uses full personal allowance, no tax | |
| 2. ISAs | £597,200 | Flexible tax free, withdraw £17,930 each | £29,860 | No tax – ISA income and | |
| 3. GIA | £400,000 | Withdraw £20,000 | £20,000 | Utilise both CGT and dividend tax allowances, limiting tax liabilities. | |
| 4. Offshore bond | £500,000 | 5% tax-deferred withdrawal | £25,000 | No immediate tax liability | |
| £2,000,000 | £100,000 | ||||
A few technical notes on this case study
- This example doesn’t include the 25% tax-free lump sums available from the pensions.
- For the GIA, we are assuming a 3.5% annual growth rate on the £400,000 investment, which will generate around £14,000 in profit per year. With a combined CGT exemption of £6,000, Mike and Judy could realise a little under half of the gains tax-free. In practice, this means they could sell up to around £170,000–£175,000 of the GIA each year without triggering a CGT liability (provided no other gains are realised in that tax year).
- A full state pension is likely to utilise most of an individual’s income tax allowance.
- The only wrapper likely to create an annual tax bill is the GIA, depending on how it is invested. Dividend payments from stocks and shares (but not ISAs or pensions) will be taxable. You have an annual £500 tax-free dividend allowance per person.
The best plan is to plan
There are various ways to structure your finances to manage taxes efficiently, both now and for your beneficiaries. The four-box principle is just one example. Tax planning is complex, and it pays to get help.
We can offer advice that will enable you to decide and implement the best way forward for your circumstances. The earlier you start, the more successful your strategy is likely to be.
For some, that old proverb surely needs an update: ‘Don’t put all your eggs in one basket – try four boxes.’
Of course, with the Autumn Budget coming up on 26th November, we will be keeping a close eye on any changes to taxation. In the meantime, we highlight the value of long-held plans and caution against taking decisions based on rumours.
Disclaimer
- These numbers and illustrations used are just to provide an example of the way the wrappers work. Your adviser would help you structure your own plans and details such as growth and timespan.
- Tax laws can change, so any strategy must be monitored.
- Growth assumptions, investment returns, inflation, and charges can all alter outcomes.
- With all financial planning, ongoing review is needed, and this sort of strategy should only be undertaken with professional advice.
1. Don’t Put All Your Eggs in One Basket – Meaning, Origin and Usage – English-Grammar-Lessons.com
2. Tax when you get a pension: What’s tax-free – GOV.UK
3. Individual Savings Accounts (ISAs): Overview – GOV.UK
4. Insurance Policyholder Taxation Manual – HMRC internal manual – GOV.UK
