Five allowances to use before tax year end

Using available allowances should become an annual habit to ensure your financial plan is in the best possible shape.

This has become even more important in recent years as the UK population grapples with high inflation. While down slightly from 2025 highs, it still sits above the Bank of England’s 2% target, contributing to a higher cost of living.

Rising costs create a double-edged sword. Increased daily costs take more from your disposable income and savings, plus the need for higher retirement contributions, to ensure your plan will stretch further into old age.

These opposing pressures can make it harder to stay on track, which is why it is important to use any relevant tax-free allowances.

•  ISA 

For the 2025/26 tax year you can pay up to £20,000 into an individual savings account (ISA). You can save in a cash ISA or a stocks and shares ISA or a combination of the two, up to the total maximum annual ISA limit. Annual subscriptions into cash ISAs are set to fall to a maximum of £12,000 from April 2027, for those aged under 65. Your ISA allowance cannot be carried forward, so it is a ‘use it or lose it’ allowance.

The interest, income and growth within ISAs are exempt from tax, making ISAs an important financial planning tool.

Cash ISAs are likely to suit those who think they might need to access their money in the short term and wish to benefit from competitive interest rates.

In contrast, a stocks and shares ISA offers the potential for growth over the long term.

Investors can access the money in a stocks and shares ISA easily, but staying invested for the medium to long term can help to smooth out market volatility.

Money drawn from an ISA is also tax-free with no restrictions on how much or when it can be accessed.

• Pension contributions

Pensions remain one of the most tax-efficient ways of saving for the long term due to the tax relief on contributions.

Tax relief is limited on your personal contributions to 100% of your earnings or £3,600 if greater in the tax year up to a maximum of £60,000, but that is still a great tax incentive. The real bonus is you will receive tax relief at your highest rate of tax. When paying into a personal pension, the scheme will claim 20% tax relief on your behalf, and you can then claim the extra 20% or 25% depending on your rate of tax from HMRC, reducing the cost of the contribution overall.

In the 2025/26 tax year, the total amount of contributions that you, your employer and any third party can make efficiently is limited by the annual allowance, which is £60,000 for most people. If your income exceeds £200,000, it may be tapered to as low as £10,000, although unused allowances can be carried forward for up to three years.

In addition to receiving tax relief on contributions, growth inside your pension is also tax-free. This allows investments to grow more efficiently.

From April 2027, most pension funds will form part of your estate for inheritance tax (IHT) purposes – a change that could add a layer of complexity to planning. Even so, pensions remain a highly valuable and tax-efficient retirement tool.

• Capital gains tax 

Capital gains tax (CGT) may apply when you sell assets, such as stocks and shares (outside an ISA or pension), a second property, art or antiques.

Individuals have an annual CGT allowance, called the annual exempt amount. This allowance stands at £3,000 for individuals and also assets held in trust if the beneficiary is vulnerable, or £1,500 for assets held in most trusts. Spouses and civil partners living together can combine their £3,000 allowance to create a £6,000 buffer for jointly held assets.

The best use of CGT depends on your personal situation. If you plan to sell an asset to boost retirement income, for example, you could try spreading the sale over a number of years, where possible. This could enable you to use your CGT allowance over multiple years.

CGT can be complex, so this is where professional advice can help you work out the most tax-efficient strategy.

When selling assets, CGT applies over and above the annual exempt amount. The CGT you will pay depends on your income tax rate.  It applies at 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers.

• Dividend allowances

If you own shares, you might receive dividends. Although these are not taxable if within a pension or an ISA, they are if you own them directly. In the 2025/26 tax year, you do not pay tax on the first £500 of dividends you receive – called the dividend allowance.

Your dividends are added to your other income and the amount you pay if you go over the dividend allowance depends on your resulting income tax band. For the 2025/26 tax year, the tax rate on dividends is 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.

These rates will change from April. In the 2026/27 tax year, the tax rate on dividends will rise to 10.75% for basic rate taxpayers and 35.75% for higher rate taxpayers. The additional rate band will remain unchanged.

This is why, where possible, holding stocks and shares within an ISA is more tax efficient.

• Gifting

Everyone has an annual exemption for inheritance tax, which is £3,000 in the 2025/26 tax year. If unused, it can be carried forward for one year. This means that you can give away money or possessions to the value of your annual exemption without any future impact on your estate.

If you go over the annual exemption and you die within seven years of making the gift, then any excess will usually be included within your estate. It means IHT could be payable on the money.

There are additional allowances for gifts. For example, if one of your children or grandchildren is getting married, you can gift up to £5,000 to a child and £2,500 to a grandchild. This is on top of your £3,000 annual gifting allowance. You can also gift £250 as many times as you like to different people within the tax year without any consequences.

Gifting is often overlooked as a tax-planning tool, but it can be extremely useful. If you are worried about the effect that IHT could have on your estate, a gift plan can help mitigate the bill.

With a gift plan, you can use your annual allowances to invest (typically into an investment bond or a similar product) and transfer the asset into a trust controlled by you.

This type of structure allows you to reduce your future IHT bill by steadily moving assets outside of your estate over time while passing on wealth to beneficiaries in a controlled, structured way*.

Five allowances, one solution

Claire Trott, head of advice at St. James’s Place, says: “Taking a holistic approach to planning is key to a good strong financial future. This means not ignoring these allowances – however small – and using them in the most efficient way each and every year where possible.”

Being aware of your allowances and maximising the usage annually can help you forge the best plan, so you’ll feel confident in your financial position.

Ongoing professional financial advice can help you reach your goals by identifying the most valuable tax allowances for your circumstances and applying them consistently over time.

An investment in equities and shares will not provide the security of capital associated with a deposit account with a bank or building society. However, please bear in mind that over the long-term inflation will erode the purchasing power of your capital.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.

Please note that cash ISAs are not available through St. James's Place.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

*Subject to elifibility and HMRC ratification.

Trusts are not regulated by the Financial Conduct Authority.