Most people I sit down with want to pay less tax. Fair enough. What bothers me is the shape some portfolios end up in—twisted into knots because somebody stopped asking why they were investing in the first place. The tax tail starts wagging the investment dog so hard that nobody remembers what the dog was for.
I’m Glynn Kerr. I’ve spent my career helping people separate level-headed financial reasoning from decisions driven by anxiety. This article is about a line that gets smudged more than it should: the boundary between being tax-efficient and being tax-obsessed.
Tax Efficiency Is a Tool, Not a Strategy
Tax-efficient investing simply means setting up your affairs so you keep more of what you earn, inside a plan that actually serves your life. It might mean using an ISA or a pension wrapper, parking income-producing assets in the right account, or timing a withdrawal sensibly. None of that changes what you own or why you own it. It just cuts down on unnecessary leakage.
Tax-obsessed investing is a different animal. Here, the tax result drives the investment call. You hold something not because it matches your long-term needs but because it produces a friendly tax outcome this year. You hang on to a holding you no longer believe in, purely to sidestep a capital gains bill. You leave a company pension in a clunky old scheme because moving it sounds like a faff, even though the ongoing charges gnaw away more than a one-off tax charge ever would.
In a fiduciary-minded practice, we start with the life you want, then the portfolio, then we look at how to run it efficiently. Flip that order—letting the tax code write your investment policy—and it’s a bit like choosing a house based only on the colour of the front door.
How Tax Obsession Creeps In
It rarely starts with greed. More often, it starts with exhaustion. Someone has spent years watching tax rules lurch around, reading headlines about raids on pensions or dividend allowances, and they start to feel the system is rigged. So they grab for control wherever they can find it.
I’ve met investors clutching wildly concentrated portfolios because selling would trigger a gain. I’ve met people who refused to draw more than their personal allowance from a pension, even with clear spending needs, because paying basic-rate tax felt like a personal failure. And I’ve met business owners who left cash dozing in a company account, earning nothing, because extracting it and coughing up dividend tax was too painful to contemplate.
In every case, the tax tail was thrashing the dog so hard the dog was dizzy. The question they needed to ask wasn’t “How do I pay zero tax?” It was “What is my money actually for?”
The Retirement Income Trap
Nowhere does this tension show up more clearly than around retirement. Accumulators often fixate on the tax relief going in. Decumulators fixate on the tax cost coming out. Both groups can lose the plot.
Take someone nearing retirement with a decent-sized pension pot. They’ve been conditioned to treat the 25% tax-free lump sum as sacred. So they grab it, even if they don’t need the cash, because leaving it feels like a waste. They then park the money in a taxed savings account earning less than inflation, while their pension pot stays invested inside a tax-sheltered wrapper. Net result? They’ve shifted money from a tax-efficient pot into a tax-inefficient one, voluntarily, because the label “tax-free” felt magnetic.
That isn’t tax efficiency. That’s tax theatre.
A calmer approach asks: What income do I need? What’s the most dependable way to produce it? Which accounts should I draw from, and in what order, to keep the tax bill sensible over a full retirement—not just this tax year? Those are the discussions worth having, and they often point to different choices than the ones driven by an obsession with this year’s tax figure. If you’re still years away from that point, the question you should be asking is less about tax rates and more about the kind of life you’re actually building toward. I wrote about that here: The Question You Should Be Asking Years Before You Retire.
When Tax Efficiency Makes Genuine Sense
None of this means you should ignore tax. That would be daft. There are quiet, unglamorous moves that improve after-tax outcomes without twisting your portfolio out of shape.
Using your annual ISA allowance before the tax year ends is one. Shifting income-producing bond funds into a pension or ISA, while keeping growth-oriented equities in a general investment account, can be another. Making use of both spouses’ allowances and tax bands is often the simplest and most overlooked step. Harvesting capital gains within the annual exempt amount, where it lines up with a planned rebalance, can make sense. Bed-and-ISA transactions, where you sell a holding and repurchase it inside the shelter, tidy things up without altering your exposure.
Notice what these moves share: they leave the investment strategy alone. They don’t change what you own. They just position it better.
The Emotional Cost of Getting It Wrong
Tax obsession carries a price that never shows up on a tax return. It’s the mental load of tracking rules that shift every Budget. It’s the second-guessing of perfectly sensible decisions because a friend mentioned an offshore bond at a dinner party. It’s the reluctance to spend your own money, even on things that matter, because the transaction triggers a tax charge.
I see this most clearly with older clients who have done well. They have more than enough. But the thought of writing a cheque to HMRC feels so offensive that they shrink their lives to avoid it. They skip the family holiday. They delay a gift to a child who could really use it now, not as an inheritance. They keep the draughty windows because the capital feels safer untouched.
That isn’t prudence. That’s a cage built out of tax returns.
My job, as I see it, is to remind people what the money is for. Tax is a cost of living in a civilised society. Paying it means you made money. Dodging it unnecessarily is sensible. Arranging your life to dodge it entirely is a different project, and it rarely ends somewhere happy.
A Fiduciary Test
Here’s a simple test I use with clients. When you’re considering a move mainly for tax reasons, ask: If the tax treatment were identical, would I still do this? If the answer is no, you’re probably letting tax steer, and you should pause.
A second test: Am I solving for this year’s tax bill, or for my lifetime after-tax outcome? Short-term tax minimisation and long-term wealth building are not the same thing. They sometimes clash directly.
This is where a fiduciary standard matters. If I’m acting in your best interest, I can’t recommend a strategy that saves you £2,000 in tax this year but costs you £20,000 in lost growth or unnecessary risk over the next decade. The sum has to work across the whole timeline, not just the visible part.
Building a Portfolio That Breathes
A well-built portfolio should be flexible enough to roll with tax changes without needing to be torn apart. That means sensible diversification, appropriate use of wrappers, and enough liquidity to meet spending needs without forced sales at bad moments. It also means accepting you’ll pay some tax—and that this is evidence the plan is working.
I think of tax efficiency as seasoning, not the main ingredient. You salt the dish; you don’t build a meal around salt. When the investment strategy is solid, the tax planning can be applied lightly and adjusted as rules shift. When the tax planning is the strategy, every Budget becomes a crisis.
If you’re working with an adviser, listen to how they talk about tax. Do they start with your goals, or do they start with a product promising a tax break? Do they ask about your family, your business, your worries, or do they lead with allowances and reliefs? The order matters. It tells you whether you’re dealing with a planner or a tax-mitigation salesperson.
FAQ
Is it ever wrong to use an ISA?
Using an ISA is nearly always sensible because it shelters future growth and income from tax without locking up your money. The only real exception would be if you’re carrying expensive debt that should be cleared first, or if you’re tying up cash you’ll need imminently in an account with withdrawal restrictions. Otherwise, an ISA is a clean example of tax efficiency that doesn’t mess with your investment choices.
Should I avoid taking income that pushes me into a higher tax band?
Not automatically. The goal is to meet your spending needs sustainably. If you need the income and the only way to get it triggers a higher rate, the real question is whether you can afford the net amount. Obsessively staying below a threshold while underspending your life is a poor trade. A good adviser will model the long-term effect, not just the marginal rate on a single withdrawal.
How do I know if I’m being tax-obsessed?
A clear sign is when you make investment decisions you wouldn’t otherwise make, purely because of the tax result. If you’re holding a single stock because selling means paying capital gains tax, or you’re refusing to restructure an inherited portfolio because it sounds complicated, you may have crossed the line. Another sign is tax anxiety that stops you from spending on things you value. At that point, it’s worth stepping back and reconnecting with what the money is meant to do.
What is one tax-efficient move most people overlook?
Using both spouses’ allowances fully. This includes personal allowances, dividend allowances, capital gains exemptions, and ISA subscriptions. Many couples hold assets in one name out of habit, missing the chance to split income and gains across two sets of tax bands. It’s simple, legal, and often saves more than exotic schemes that carry far more risk.