Taxation has never been far from the headlines in recent months. Since taking office, Labour chancellor Rachel Reeves has already announced changes that will probably impact you, including those to Inheritance Tax (IHT) and Capital Gains Tax (CGT). As the chancellor remains committed to balancing the public finances, there are fears that more tax hikes could come soon.
As such, you might be looking for ways to potentially reduce the tax you pay. Fortunately, there are several allowances and exemptions you can use to build and hold wealth tax-efficiently, many of which reset at the beginning of the tax year on 6 April 2025.
Taking full advantage of these tax-efficient opportunities could help you mitigate a large bill, yet data shows many people fail to do this. For instance, ISAs can be a tax-efficient way to save and invest, yet the UK government reports that only 16.9% of ISA subscribers contributed the maximum amount of £20,000 in 2021/22.
So, as the end of the tax year approaches, you may want to use these important allowances and exemptions to reduce your tax bill.
1. Pension Annual Allowance
Your pension is an excellent tax wrapper that lets you build wealth for retirement. You automatically receive 20% basic-rate tax relief on your contributions, meaning that £100 going into your pension only “costs” you £80. This is because the government contributes the other £20.
If you’re a higher- or additional-rate taxpayer, you may be able to claim another 20% or 25% tax relief through self-assessment.
However, it’s important to note that the amount of tax relief you can benefit from is limited by your “Annual Allowance”. This is the total amount you can contribute to your pension each year – including your own payments as well as employer contributions and tax relief – before triggering an additional tax charge. In 2024/25 this stands at £60,000 or 100% of your earnings, whichever is lower.
Your Annual Allowance will be reduced on a tapering basis if you earn over £260,000 or have flexibly taken any taxable income from your defined contribution (DC) pension.
The tax relief on pension contributions could help you build your retirement pot faster, potentially meaning you can reach your savings goals sooner. That’s why you may want to use as much of your Annual Allowance as possible to maximise tax relief before the end of the tax year.
You might also be able to carry forward any unused Annual Allowance from the past three years, provided you have used your full allowance for the current year. This means that you will lose any remaining Annual Allowance from 2021/22 in April 2025. So, you might want to check whether you have any unused allowances and carry them over, where possible. That said, the rules around this can be complex so it’s advisable to seek professional advice first.
2. ISA allowance
ISAs are another useful vehicle for saving and investing because you don’t pay Income Tax, CGT or Dividend Tax on any interest or investment growth on wealth held in these accounts. You won’t pay Income Tax when withdrawing the funds either.
In 2024/25, you can contribute up to £20,000 across all your ISAs. Your partner also has their own ISA allowance so you could potentially save £40,000 tax-efficiently between you. Yet, as discussed earlier, many savers don’t take full advantage of this.
You could also open a Junior ISA – which enjoys the same tax benefits as an adult ISA – on behalf of a child or grandchild. Each child has their own £9,000 ISA allowance, separate from your adult ISA allowance.
If you’ve already used your own allowance, you may decide to save tax-efficiently on behalf of a child instead. Our video on investing for children has more information on this.
Crucially, you can’t carry these ISA allowances over to the following year, so anything you don’t use by 5 April, you lose.
3. Capital Gains Tax Annual Exempt Amount
CGT is an important tax to consider as the chancellor increased the rate with immediate effect in her Budget towards the end of last year.
You could pay the levy on profits when selling or “disposing” of certain assets including:
- Stocks and shares outside an ISA
- Business assets
- A property that isn’t your main home
- Personal possessions worth more than £6,000 (excluding your car).
In 2024/25, you have an “Annual Exempt Amount” of £3,000. This means you can make a gain of up to £3,000 without paying CGT. Any gains that exceed this threshold could be subject to CGT, and the rate you pay is based on your marginal rate of Income Tax. You could pay:
- 18% if you’re a basic-rate taxpayer
- 24% if you’re a higher- or additional-rate taxpayer.
If you plan to sell certain assets in the future, you might consider whether you have any of your Annual Exempt Amount left for this year. In some cases, considering when you dispose of assets, and spreading sales across different tax years, could mean that you use as much of your Annual Exempt Amount as possible each year.
You may also be able to pass assets to a spouse or civil partner without CGT, and they have their own Annual Exempt Amount to use. Using both allowances might help you mitigate the CGT you pay.
We can help you explore the most tax-efficient ways to dispose of assets and make the most of your Annual Exempt Amount. This is especially important as we approach the end of the financial year as you can’t carry your Annual Exempt Amount forward.
4. Gifting annual exemption
In her Budget in October, Rachel Reeves announced that pensions will no longer be exempt from IHT after 5 April 2027. As such, you may be looking for ways to reduce the tax your family pays on your estate when you’re gone.
Gifting wealth while you’re alive is one way to achieve this because any funds you give fall outside of your estate for IHT purposes, provided you survive for seven years after giving them.
You also have a “gifting annual exemption” of £3,000. Any gifts within this threshold immediately fall outside your estate, regardless of how long you live after passing the wealth on. Using this £3,000 exemption each year could help you transfer wealth to your beneficiaries and reduce the size of your estate, meaning they may not pay as much IHT when you pass away. Your partner has their own exemption to use so, as a couple, you could pass on up to £6,000 that is immediately free of IHT.
It’s worth noting that your loved ones might benefit more from the wealth now, so they can work towards personal goals such as buying a home, getting married, or starting their own retirement fund.
You may be able to carry over unused gifting annual exemption, but only from the previous year. As such, you may want to make sure you use as much of your allowance as possible each financial year.
Get in touch
We can help you make the most of these allowances and exemptions before 5 April, so you can potentially reduce the tax you pay.
Email hello@fcadvice.co.uk or call 0333 241 9900 for more information.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning or estate planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.