The Early Bird Gets the Worm: Making the Most of Your 2025/2026 Tax Year Allowances

Making use of your allowances can help save significant amounts in tax every year. The earlier you start planning, the more you will benefit.

It can be tempting to put things off, but starting now can save time and hassle rather than waiting until the end of the tax year.

Below, we explain the main allowances available to you this tax year, and how you can make the most of them.

Individual Savings Accounts (ISAs)

You can contribute up to £20,000 to your ISA in the 2025/2026 tax year. You can allocate this to cash, stocks and shares, or a mix of both.

A cash ISA may suit your needs if you are building an emergency fund or saving for a short-term goal. A stocks and shares ISA is more likely to produce above-inflation growth over the longer term.

The income and growth on your ISA are not subject to tax, and you can usually withdraw the money without penalty. Under current rules, you can replace any money withdrawn in the same tax year without using up your allowance, although not all providers allow this.

If you don’t use your ISA allowance each tax year, you can’t carry it forward. Using your allowance early in the tax year means that your contributions have more time to grow.

Pensions

Pensions are one of the most tax-efficient investments you can make, although there are a few limitations to be aware of.

If you are employed, it’s a good idea to opt into your workplace pension scheme. You will benefit from tax-free growth and tax relief on your contributions, and your employer will also contribute.

If you are self-employed or wish to make additional contributions, consider paying into a personal pension. Company directors may find that making employer contributions through the business is an efficient option, as you will also benefit from corporation tax relief.

In the same way as with ISAs, making your pension contributions early gives you more time to benefit from tax-efficient growth. However, pensions have an additional advantage, as you can carry forward contributions from up to three previous tax years. (The amount depends on the individuals circumstances and is subject to limitations)

Capital Gains Exemptions

Capital gains tax (CGT) may be payable if you sell investments (including property) and realise a profit. It can also apply if you make gifts, as HMRC will take into account the market value at the time of the gift, even if no money changed hands.

You can realise gains of up to £3,000 this tax year without paying tax. It can be beneficial to use your exemption each year, as this avoids large gains building up and becoming taxable later. You can do this by switching funds, moving money into your ISA or taking withdrawals to supplement your income.

Income Tax Allowances

There are also a few income tax allowances that you can take advantage of:

• Personal allowance – This is currently £12,570 per year. You will use this automatically if you receive income from employment or a pension. (however this tapers away, your personal allowance will go down by £1 for every £2 that your adjusted net income is above £100,000) If you run a company or take a flexible income from pensions or investments (e.g. investment bonds), it’s worth planning withdrawals to make the most of your personal allowance.
• Dividend allowance – You can receive up to £500 in dividend income before paying tax.
• Savings allowances – You can earn up to £1,000 in tax-free interest if you are a basic rate taxpayer (£500 for a higher rate taxpayer and nil for an additional rate taxpayer). Additionally, if you earn under £17,570, you can receive up to £5,000 in interest without paying tax.
• Marriage allowance – a lower-earning spouse can transfer up to £1,260 of their tax-free personal allowance to their partner (providing the partner is a basic rate taxpayer), potentially reducing the household’s tax bill by up to £252.
• Assets can be passed between spouses to make use of both sets of allowances.

Saving for Children

You can contribute up to £9,000 per year into a Junior ISA for your children or other young relatives. In the same way as adult ISAs, the contributions benefit from tax-free growth.

Children can also benefit from pension contributions. You can contribute up to £2,880 (grossed up to £3,600) into a pension for a child.

Contributing early in the tax year provides greater scope for growth. It also means there is less chance of missing out on the allowances, as they can’t be carried forward into the next tax year.

Inheritance Tax Planning

Making gifts is one way to reduce your Inheritance Tax (IHT) liability.

You can gift up to £3,000 each tax year, which is immediately outside your estate. This exemption can be carried forward by up to one tax year. Some other exemptions are also available.

Any other gifts will drop out of your estate after seven years. Planning early means that the clock starts ticking sooner and there are more opportunities to reduce your IHT bill.

Advanced Tax Planning

There are a few investment options which offer significant tax advantages; however, they also carry substantial risks. These include Alternative Investment Market (AIM) shares, Enterprise Investment Schemes (EIS), Venture Capital Trusts (VCT), and unlisted business relief solutions.

Investing in a VCT or EIS can reduce your income tax bill by up to 30% (or 50% for some types of ‘seed’ EIS). You can also carry back EIS investments to an earlier tax year or use the investment to defer tax on realised gains. This gives you significant control over your tax bill.

AIM, EIS, and unlisted business relief solutions can also offer up to 100% relief from Inheritance Tax (up to a “cap” of £1 million).

These solutions are extremely complex and high risk, and advice is strongly recommended.

Please don’t hesitate to contact a member of the team to discuss financial planning options in the current tax year.

The value of your investments and pensions (and any income from them) can go down as well as up which would have an impact on the level of benefits available