Interest rates remain elevated, consumer confidence is weak, and the labour market has shown signs of strain. At the same time, there is ongoing speculation that the Government may be reducing the annual cash ISA allowance from its current level of £20,000 to as low as £4,000, as well as implementing a broader tax policy, in upcoming budgets.
In this environment, it’s easy to lose sight of the importance of refreshing your savings strategy and making full use of available tax-efficient allowances at the start of the new tax year.
But what are these allowances, and where can we save our money?
Individual Savings Account (ISAs) are a useful wrapper within which to save surplus cash. ISAs come in many forms; for example, cash, stocks & shares, lifetime, flexi and innovative finance. Without getting into the features of each one, they all share a common objective of allowing people to save money in a tax-free environment.
The ISA annual allowance is £20,000 per tax year across all ISAs held, although a Lifetime ISA has its own annual maximum of £4,000 per year, but this amount counts towards the overall £20,000 limit.
Alongside ISAs are Junior ISAs, which again can be cash or stocks & shares based and can be set up for under 18s. The annual allowance on these is currently £9,000.
Carry forward rules do not apply for ISA allowances – it’s ‘use it or lose it’ each tax year.
Why are ISAs so relevant now?
While the Bank of England has been making interest rate cuts, the base rate of 4.00% is still high compared to recent history. This means savers may continue to earn reasonable returns, so it’s sensible to ensure these are sheltered from tax wherever possible.
Additionally, recent speculation about possible reductions to the ISA allowance in the upcoming Budget has prompted a surge in ISA deposits, as savers and investors seek to lock in current tax-free benefits before any potential changes.
ISAs are especially valuable in today’s economic climate, as they provide a tax-free wrapper for your savings and investments at a time when other allowances, such as the dividend and Capital Gains Tax (CGT) exemptions, have been significantly reduced. Making full use of your annual ISA allowance is a key strategy for protecting your returns from unnecessary tax.
It’s important to remember that ISAs can play a complementary role alongside pensions as part of a broader retirement planning strategy. While pensions remain the most tax-efficient vehicle for long-term retirement savings given their tax reliefs, recent changes proposed in the Autumn 2024 Budget could, for some people, mean pensions become particularly tax inefficient on death, therefore, diversifying your savings vehicles now may provide greater flexibility for tax-planning long-term.
In addition, ISA funds can be accessed at any time without penalty or tax implications (except for Lifetime ISAs, which have specific rules). This flexibility makes ISAs especially useful for those who may wish to access some of their savings before reaching the minimum pension age, or to bridge the gap between early retirement and when pension benefits become available.
Other beneficial products
Alongside ISAs, Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EISs), and Seed Enterprise Investment Schemes (SEISs) are alternative types of investments that continue to offer attractive tax reliefs for those willing to accept higher risk. The headline saving is income tax relief (30% of the amount invested for VCTs and EISs, 50% for SEISs) while there is also the potential for tax-free dividends and nil-rated capital gains dependant on the vehicle used.
Maximum annual investments for these are as follows:
- VCT – £200,000
- EIS – £1,000,000 (increased to £2,000,000 provided anything above £1,000,000 is invested into knowledge-intensive companies)
- SEIS – £200,000
The above investments are considered high-risk and therefore advice is crucial to ensure that they are suitable.
In conjunction with the above you have pensions, with access restricted to people over the age of 55 (increasing to age 57 in April 2028), representing the opportunity to contribute towards long-term retirement savings.
The standard pension contribution annual allowance is £60,000 gross, the maximum contribution an individual can make or receive in a tax year without receiving a tax charge. However, individuals may be able to ‘carry forward’ unused allowances from the preceding three tax years, potentially saving more than the standard annual allowance in a tax year. Restrictions can apply if your adjusted income is in excess of £260,000 (if their threshold income also exceeds £200,000), as the allowance may be tapered by £1 for each £2 of income in excess of this, to a minimum contribution allowance of £10,000.
The ability to personally contribute (i.e. not through your employment) up to £60,000 and receive tax relief, may be restricted by each person’s income level. Personal tax relievable contributions are restricted to 100% of your UK relevant earnings.
As touched on above, from 6 April 2027, it is proposed that unused pension funds and pension death benefits will be included in an individual’s estate for Inheritance Tax (IHT) purposes. This is a significant change from the current rules, where most pensions are outside the estate for IHT on death. The Government has announced these changes, but final legislation and details are still under review and may be subject to further clarification before implementation.
Planning regular savings is a crucial step on the road to planning for a tax-efficient income in later life. Each of the above strategies can factor into a long-term income strategy focused on utilising a variety of ‘income’ allowances to target sustainability and tax-efficiency.
The unusual suspects that are not always utilised!
The most well-known income allowance is the personal allowance, which is the amount of income you can receive each year before paying Income Tax. For the 2025/26 tax year, the standard personal allowance remains at £12,570, unchanged since 2021/22 and now frozen until April 2028, when the personal allowance is planned to rise again in line with inflation. If your income exceeds £100,000, your personal allowance is reduced by £1 for every £2 earned above this threshold, meaning it is fully withdrawn once your income reaches £125,140.
Income above the personal allowance is taxed at incremental rates: 20% (basic rate) up to £50,270 (including the personal allowance of £12,570), 40% (higher rate) up to £125,140, and 45% (additional rate) above £125,140 in England, Wales, and Northern Ireland, with different bands and rates applying in Scotland.
For couples, the marriage allowance allows a non-taxpayer to transfer up to £1,260 of their personal allowance to a basic-rate taxpayer spouse or civil partner, potentially saving up to £252 a year.
The dividend allowance has been significantly reduced in recent years and now stands at just £500 for 2025/26. This means only the first £500 of dividend income is tax-free, with any excess taxed at 8.75% for basic-rate taxpayers, 33.75% for higher-rate, and 39.35% for additional-rate taxpayers.
The personal savings allowance lets basic-rate taxpayers earn up to £1,000 of savings interest tax-free, while higher-rate taxpayers can earn up to £500 tax-free. Additional-rate taxpayers do not receive a savings allowance. Notably, interest earned within an ISA and pension wrapper does not count towards this allowance, as all returns are tax-free.
The Capital Gains Tax (CGT) annual exempt amount has also been sharply reduced and is now just £3,000 for individuals in 2025/26, down from £12,300 only a few years ago. Gains above this threshold are taxed at 18% for basic-rate taxpayers and 24% for higher and additional-rate taxpayers.
With the erosion of allowances such as the dividend and CGT exemptions, more savers and investors are likely to face tax on their returns unless they make use of tax-efficient wrappers like ISAs and pensions. Proactive planning is now more important than ever to maximise these remaining allowances and protect your investments from unnecessary tax.
A tax-efficient future
Planning regular saving into a variety of investment products throughout a working life can help to position people to benefit from a tax-efficient income stream in retirement.
Working alongside a financial planner and an accountant/tax adviser is essential in order to manage the wrappers and investments used, while establishing a target income as early as possible allows an income plan to be worked towards over a number of years.
If you’d like to discuss your financial and/or retirement strategy further, contact us for a complimentary initial discussion with one of our experienced wealth management consultants.
The information contained above is based on current tax rates, is for information purposes only, and shouldn’t be considered advice. Financial advice should be sought prior to any investment decisions.
