It’s a nice problem to have. Somehow, you’ve ended up with more money than you know what to do with.

If you’ve been promoted at work, this might now be a yearly occurrence, or it could be a once-in-a-lifetime event. But what to do with that money once you have it to avoid forfeiting a chunk to tax can be a complex task.

For most people’s excess funds, ISAs offer a very nice solution. You can invest up to £20,000 each year, and this money will not be subject to tax. But if you have suddenly found yourself with enough to invest to exceed this limit, your strategy may start to become more layered.

STAYING UNDER YOUR CAPITAL GAINS TAX LIMIT

Money invested outside of an ISA, such as through a dealing account, is at risk of CGT (capital gains tax). CGT is the amount you pay on realised gains from an investment.

You can currently make up to £3,000 on your investments without getting taxed. But once you pass that limit, 18% of your gains would be paid in tax for those in the basic income rate and 24% would be paid for those in the higher income bracket. Note that this limit has been reduced dramatically in recent years, so it’s important to keep an eye on any changes.

To give a ballpark figure, if you invested £60,000 and made a 5% return in one year after fees, you would reach the £3,000 gains cap.

If your new chunk of change is a one-time occurrence, this can be a very helpful starting point. This would mean you could get around £80,000 of your money invested tax free for that first year. Although, because you don’t know exactly what return you would make on your investment, it’s impossible to know the maximum amount you could invest outside an ISA and avoid tax.

But if you were able to stay under that CGT limit, that means that in the next tax year, you could move another £20,000 of that out of your dealing account and into your ISA. Generally, the faster you can move funds into an ISA, the better, because as your money continues to grow outside an ISA, more and more will become subject to tax.

This strategy does not work as well for recurring large amounts of money, such as from a significant salary increase, because then you will have an expanding problem each year with no extra room in your ISA allowance.

SHARING YOUR SAVINGS

If you have a partner, you also have the option to gift your money. Because your partner has a £20,000 ISA allowance as well and a CGT limit of £3,000 to reach, this essentially doubles the amount of money that is protected from tax. Any money given as a gift is not subject to tax if the person making the gift lives for seven years following the exchange, and the money is not put into a trust. But it is important to be aware that the money is then legally theirs and there is no obligation to give it back to you in the case of separation.

This is not a practice that is necessarily limited to a partner. If you have children, you can pay into their Junior ISAs, which have a limit of £9,000 per year. These accounts can only be withdrawn by the child that owns it and once they become an adult. You can also gift the money to another family member or friend, but keep in mind that any money gifted is no longer technically yours.

CONSIDERING TAX-FREE ALTERNATIVES

Once you have maxed out your allowances and need to invest outside a tax-free wrapper, you may want to consider investments that are exempt from tax. Bonds are one of the simplest ways to do this.

Government bonds, also known as gilts, are not subject to capital gains tax. These are not necessarily the highest-earning investments but can be one way to continue to earn on your investments without dealing with the tax implications.

If you want to look outside government bonds, you can still avoid CGT by investing in ‘qualifying corporate bonds’ listed by the HMRC. Note that the payments you receive from the bonds will still be taxed as income and count as part of your income allowance, it is just the CGT that will not apply.

If you invest in bonds as well as equities, it can also be important to pay attention to how your money is allocated in each wrapper. For example, if you expect your equity investments to have a higher return than your bonds, it may be worth using your ISA allowance for these investments.

That way, the money you are forced to hold in an account that is subject to CGT will hopefully be making a smaller gain than whatever is inside the tax-free wrapper.

USING OTHER INVESTMENTS

If you’re happy to put your money away for a while, another strategy can be investing more heavily in your pension. Generally, the annual maximum contribution for a pension is £60,000, but this changes when you reach income levels above £200,000.

Note that if you are inheriting money, or have received the money as a gift, those assets don’t count as your income. But if those assets are invested and start earning, those earnings could start counting as income.

Pensions are still subject to tax when you withdraw from them, apart from the 25% that you receive tax free. But they do bring additional benefits for investors, such as workplace contributions in some cases and tax relief from the government.

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