Making the most of your allowances

Tax allowances and reliefs can help you shelter wealth from tax and keep more of your returns. The end of the tax year is a good time to round up what’s available and make sure you’re not missing out.

What allowances do investors get?

As well as the main personal allowance for income tax, which is £12,570 for most people, there are specific tax-free allowances that apply to savings and investments.

The Personal Savings Allowance means basic-rate taxpayers can earn £1,000 of savings interest a year before they pay tax, with higher-rate taxpayers getting a £500 limit and additional-rate taxpayers nothing at all.

Tax-free allowances for investment income and gains have been cut dramatically in recent years. While you could cash in gains of £12,300 on your investments outside of ISAs and pensions with no tax until April 2023, that annual exempt amount is now just £3,000. Similarly, the dividend income allowance has dropped from its original £5,000 rate to just £500 today, and there are increases to the dividend income tax rates coming from 6 April 2026.

In the face of rising taxes, how can you make the most of the allowances on offer?

Wrap your wealth

Tax wrappers shelter your cash and investments from taxes, so it pays to make the most of them. The best examples are ISAs and pensions, including Self-invested personal pensions (SIPPs) and Ready-made pensions.

ISAs let you shelter up to £20,000 a year from tax across the different types of accounts, and the ability to withdraw your cash tax-free if you need to. You ISA cash and investments are protected against income and capital gains tax (CGT) - meaning you keep more of your returns - and you don’t need to worry about reporting income or capital gains to HMRC.  

The ISA allowance renews on 6 April, meaning you’ll lose anything you don’t use up in the year to 5 April. But between you and your spouse or civil partner, you could wrap up to £40,000 into ISAs before the end of the tax year if you haven’t already, and another £40,000 between you both once the allowance renews.  

Have you heard about ‘Bed and ISA’?

A Bed and ISA transaction lets you sell an existing investment from your Dealing account and immediately buy it back in an ISA. This is a handy way to move investments you want to keep long term, into an ISA wrapper where any growth and income will be sheltered from tax. You’ll need enough ISA allowance remaining to buy back the investments in your ISA, and you might face tax on the sale if you’ve made gains over your annual capital gains allowance as well as other charges like stamp duty.

Learn more about Bed and ISA

Pension allowances boost your nest egg and help you cut your tax bill

A SIPP or Ready-made pension shelters your investments from income tax and CGT, but pension tax relief dramatically cuts the cost of paying into your pension each year.

The rules let you personally pay in up to 100% of your UK earnings and get pension tax relief, but this together with anything your employer pays in is also checked against an annual pension allowance, which is set at a £60,000 for most people*.  

But the power of pensions means extra contributions can also move you out of tax traps as well as higher income tax bands. Making a pension contribution can lower the income used to test your eligibility for child benefit, or losing your personal allowance and other childcare support, meaning you can move out of the trap and boost your retirement savings.

Pension ‘carry forward’ rules allow you to use up to three years of unused allowances in the current tax year. So, if you’re planning to use up this year’s allowance of £60,000 and didn’t pay anything into a pension in the 2022/23, 2023/24 or 2024/25 tax years, you could carry forward up to £160,000 of unused allowances from those three years too. This flexibility is particularly useful for business owners or anyone who is trying to make up for lost time by saving for retirement.

*Your annual allowance might be lower if your income is above £260,000 a year, or you’ve already taken income from certain types of pension.

Learn more about pension allowances

Married or in a civil partnership?

You can transfer assets between you and your spouse or civil partner without triggering capital gains tax. There’s no limit on the amount or numbers of transfers, but you should keep track of the original cost of the investments as this moves across with the transfer and will be needed when the investments are eventually sold.

If your spouse is in a lower tax bracket, they’ll pay a lower income tax rate on future dividends if they continue to hold the investment(s), and possibly a lower rate of CGT on any taxable gains when they come to sell it.

Transferring cash could also help you make the most of the personal savings allowance. A spouse in a lower tax bracket will have a higher personal savings allowance for tax-free interest and they’ll pay tax on interest above this at a lower rate.

What if I’ve already used my allowances?

If you’ve maxxed out your own allowances and still have cash you want to get invested for the long term, consider a Dealing account. These investment accounts can access our full range of investment options, but without any limits on what you can pay in or withdraw. A Dealing account does not come with the added tax wrapper benefits of ISAs and pensions, so keep in mind that you’ll be taxed on any investment income gains you make above the annual tax allowances we’ve discussed.

There are tax-free investment wrappers available for children and grandchildren in the form of Junior ISAs. Anyone can pay into a child’s junior ISA, but this is a gift to the child, meaning it no longer counts as part of your wealth and you can’t ask for it back. Junior ISA money cannot be accessed until the child turns 18 and it converts into their own account, but the generous allowance of £9,000 a year (per child) could really give them a financial headstart.