Investor Essentials: What is a tax wrapper?

The Nutmeg team

read 6 min

As part of our Investor Essentials series, we outline the tax-efficient options for your investments or savings.  

What is a tax wrapper? 

When we talk about investing, we will often use the phrase ‘tax wrapper’. This simply means your money is in an account that ‘wraps’ around your investments or savings to offer some protection from tax, as long as the money stays within these wrappers.  

There are different types of tax wrappers – ISAs and pensions are among the most common – and various wrappers will offer different tax status and flexibility. 

What’s the difference between an ISA and a pension? 

In very simple terms, with ISAs your money is taxed on the way in and with pensions it’s taxed on the way out. With an ISA you are contributing money that you may have already paid income tax on (through PAYE in your pay packet for example) and you are sheltering any growth and dividends from capital gains tax, dividends tax or further income tax.  

With a pension, you receive tax relief – or the tax back – on contributions. So, when you put money into a pension the basic rate of tax you have paid on the amount contributed is added back (and there is further tax relief for higher and additional rate taxpayers, which can be claimed via self-assessment). When you withdraw from an ISA there is no income tax to pay, but for a pension withdrawal you pay income tax at your marginal rate on all but the first 25%. 

If you were considering putting money away just for your retirement and were only to have either an ISA or a pension, a pension would usually come out on top. However, for longer-term goals besides retirement, or if you think you might need the money before you retire, then an ISA could be the way to go. If you can afford it, a combination of both a private pension and an ISA may be a suitable choice.  


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ISAs in more detail 


  • The ISA allowance for the 2023/24 tax year is £20,000. The tax year runs from the 6th April to the 5th April the following year, at which point the allowance resets (and you cannot carry forward any unused allowance from the previous tax year). 
  • You will not pay any income, dividend or capital gains tax on money in an ISA, as long as you do not pay in more than your allowance each tax year. This applies to not only basic rate taxpayers, but higher rate and additional rate taxpayers too. 
  • To open an ISA, you need to be 16 or older for a cash ISA, and 18 or older for a stocks and shares ISA and be a resident in the UK. At Nutmeg, we only offer a stocks and shares ISA. 
  • You can only pay into one cash ISA, one stocks and shares ISA, and one Innovative Finance ISA in each tax year (read more about the differences here). However, as long as you remain within your allowance, you can open and hold a mix of these ISA types every tax year. 
  • You are able to transfer your ISAs to a new provider, but must not withdraw the funds while doing so or you will lose the tax protection. 

Lifetime ISA 

  • The Lifetime ISA is a government savings initiative to encourage younger people to save for their first home or retirement. 
  • You can save up to £4,000 each tax year in a Lifetime ISA and will receive a 25% government bonus on contributions. Any UK resident aged 18–39 can open and save into a Lifetime ISA. Your first contribution must be made before your 40th birthday and you can contribute up to the day before your 50th. 
  • The government will give you a 25% bonus on every contribution you make until you reach the age of 50. So, for every £4 you invest you receive a £1 top-up. That’s a potential bonus of £1,000 each year to put towards your first home or retirement. 
  • You can choose to use these savings to buy your first home worth up to £450,000 or keep it until you turn 60. For both options, you can withdraw your money (including the 25% government bonus) free of tax on growth, dividends, or returns. 
  • If you need to withdraw your funds for any reason other than an eligible house purchase, turning 60 or due to critical illness you’ll pay a penalty. The government will charge you a 25% penalty on the total value of the withdrawal, so you may get back less than you put in. 
  • Nutmeg offers the Lifetime ISA as a stocks and shares LISA – cash LISAs are available elsewhere. 

Read more: A guide to Lifetime ISAs 


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Junior ISA 

  • A Junior ISA (JISA) is a tax-efficient account set up by a parent or guardian for children below 18 (at Nutmeg we can only open a JISA for a child under the age of 16). Anyone can contribute to the account but only the child can access the money – and only after they turn 18. Friends and relatives are increasingly turning to JISA contributions as a way to give children a financial head start in life.  
  • For the 2023/24 tax year, the annual tax allowance or limit for a JISA is £9,000, and as with all ISA allowances this resets every 6th April with the new tax year. The money in a JISA belongs to the child in all but exceptional circumstances.  
  • When the child turns 16, they may apply to become the registered contact and manage the JISA themselves. However, they cannot withdraw the money until they’re 18. As Nutmeg offers a stocks and shares Junior ISA, the child cannot become the registered contact until they’re 18.  
  • Any contributions to a child’s JISA are not factored into your annual ISA allowance. Nor do they count towards your Lifetime ISA limit. 
  • Nutmeg offers the Junior ISA as a stocks and shares JISA – cash JISAs are available elsewhere. 

Read more: Best options for grandparents – Junior ISA or ISA? 


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Personal Pensions – the basic facts 

What are the different types of pension? 

  • Provided you have the qualifying national insurance record, most people in the UK can claim a state pension. 
  • If you’re employed, you’ve likely been auto-enrolled into your employer’s workplace pension scheme.If you’re self-employed, or even if you already have a workplace pension, you can also have a personal pension.   

Pension allowance and tax relief 

  • Most people in the UK can get tax relief on pension contributions up to 100% of their earnings or up to the government-set annual allowance. 
  • The annual allowance is the amount of money you can contribute to your pensions without incurring any tax charges. For most people, the annual allowance is £60,000 for the 2023/24 tax year. 
  • Tax relief is paid on your pension contributions at the highest rate of income tax you pay. So: 
  • Basic-rate taxpayers get 20% pension tax relief. 
  • Higher-rate taxpayers can claim 40% pension tax relief. 
  • Additional-rate taxpayers can claim 45% pension tax relief. 

Pension carry forward  

  • By using pension carry forward, you can use any unused annual allowance from the previous three tax years to make additional pension contributions in the current tax year.  You can find out more about this in one of our ‘Nutmeg nuggets’ that covers how the carry forward option can be used. 

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This should give an overview of pensions, ISA types and the basic rules relating to them. However, this is not intended to be a comprehensive guide, and there are more detailed rules that can apply to all the ISA types, as well as rules relating to pension tax relief and allowances.  

There are some further details in the FAQ section on our ISA and more information about the different ISA types on our ‘what is an ISA’ page.  

To find out more about pensions and ISA, or if you have any questions related to different available investments, consider booking a free call to talk with one of our experts 


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Nutmeg offers stocks and shares ISAs, Lifetime ISAs, Junior ISAs and personal pensions. 

Risk warning 

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Tax treatment depends on your individual circumstances and may be subject to change in the future. 

The Nutmeg team
This was a team effort from Nutmeg.

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