Originally published at: https://blog.investengine.com/how-to-make-the-most-of-your-tax-allowances/
Tax-free allowances don’t stick around – you lose them if you don’t use them. But they can make a huge difference to your finances, especially if you invest. In this guide, we’ll walk through the key UK tax allowances, and how to take full advantage of them. We’ll also note what’s expected to change for the 2025/26 tax year, so you can plan ahead.
Whether you’re investing through a stocks and shares ISA, a pension, or a general investment account, using your allowances wisely can cut your tax bill and boost your long-term gains. Here’s what you need to know.
Tax treatment depends on personal circumstances and is subject to change, and past performance is not a reliable indicator of future returns.
Your ISA allowance
Your Individual Savings Account (ISA) allowance is £20,000 per person for the 2024/25 tax year. The key rule to remember: use it or lose it. Unused allowance doesn’t roll over into the next year.
All income and gains from investments held in an ISA are completely tax-free. That means no capital gains tax (CGT), no income tax on dividends or interest, and no tax when you withdraw the money. It’s one of the simplest and most generous tax breaks available to UK investors.
There are different types of ISAs, including:
- Stocks & Shares ISAs
- Cash ISAs
- Innovative Finance ISAs
- Lifetime ISAs
You can split your allowance across different types, as long as you don’t exceed the £20,000 total.
What changed in 2024/25?
From April 2024, the rules changed, allowing you pay into more than one ISA of the same type in a single tax year. In other words, you can open and contribute to two separate stocks and shares ISAs in the same year, provided you stay within the overall £20,000 annual limit.
This adds flexibility and makes it easier to manage your money across different providers.
However, not all ISA providers currently support this change, so it’s worth checking with your provider before assuming you can open multiple ISAs of the same type.
What’s a flexible ISA?
A flexible ISA allows you to withdraw money and then replace it within the same tax year without affecting your annual ISA allowance. For example, if you contribute £10,000 and then withdraw £2,000, you can still pay in another £12,000 that year. This feature can be particularly helpful if you need temporary access to your cash.
Not all ISA providers offer flexible ISAs, so you’ll need to check if yours does – InvestEngine’s ISA, for example, is flexible.
Flexible ISAs are available for cash ISAs, some stocks and shares ISAs, and some Innovative Finance ISAs.
What’s expected in 2025/26?
The annual ISA allowance remains at £20,000. No additional ISA changes have been confirmed for 2025/26 as of now, but it’s worth watching for any updates in the next Budget.
Your pension annual allowance
Pensions are another powerful way to invest tax-efficiently. The standard pension annual allowance is £60,000 for the 2024/25 tax year. This is the maximum you can contribute each year while receiving tax relief – but it’s not always that simple.
Your actual allowance depends on your earnings. For example:
- You can only put in as much as you earn. So if you earn £40,000, your annual pension contribution limit is £40,000
- If you earn more than £60,000, and your total income is below £200,000, you can usually contribute the full £60,000
- If your income is over £200,000 and your total ‘adjusted income’ (including employer pension contributions) exceeds £260,000, your annual allowance may gradually reduce to as little as £10,000 – but speak to a financial planner for more information on this, as everyone’s situation is different
You can also carry forward unused allowance from the previous three tax years, provided you were a member of a registered pension scheme.
This can significantly boost your contributions and tax relief, but calculating it can be complex, especially if you have multiple pensions or variable income. It’s worth speaking to a financial adviser to check what you can claim.
Tax relief on pension contributions is a major benefit:
- Basic-rate taxpayers get 20% relief automatically
- You may have to claim any additional relief yourself if you’re a higher-rate or additional-rate taxpayer
- This can be done through your tax return or through HMRC’s online service.
Our tax relief calculator can help you calculate what you could be entitled to claim.
What’s changing in 2025/26?
There are no confirmed changes to pension allowances yet for 2025/26. But the government reviews pension tax relief regularly, so it’s worth keeping an eye on the next Budget.
The personal allowance
Most people in the UK are entitled to a personal allowance. For 2024/25, it’s £12,570. This is the amount of income you can earn before you start paying income tax.
The personal allowance applies to your total income, including salary, pension income, savings interest and dividends. However, it starts to reduce once your income exceeds £100,000 and disappears entirely at £125,140.
For investors, this means that if your total taxable income is under £12,570, you won’t pay tax on any income from dividends or interest outside your ISA or pension.
The personal savings allowance
If you earn interest on savings or investments held outside an ISA or pension, the personal savings allowance can help. The amount you can earn tax-free depends on your income tax band:
- Basic-rate taxpayers: £1,000
- Higher-rate taxpayers: £500
- Additional-rate taxpayers: £0 (no allowance)
This applies to interest from current accounts, savings accounts, bonds, and peer-to-peer lending. If your interest income goes above your allowance, the excess is taxable.
The dividend allowance
If you hold investments that pay dividends outside of an ISA or pension, you can earn a small amount tax-free. For 2024/25, the dividend allowance is just £500 – down from £1,000 the previous year. It’s expected to stay at this level for 2025/26.
Dividend income above this is taxed at:
- 8.75% for basic-rate taxpayers
- 33.75% for higher-rate taxpayers
- 39.35% for additional-rate taxpayers
Holding dividend-paying investments inside an ISA or pension is more tax-efficient.
The capital gains tax allowance
If you sell investments or assets for a profit, you may have to pay capital gains tax (CGT). However, everyone gets an annual CGT allowance.
For 2024/25, the allowance is £3,000 – halved from £6,000 the previous year. It’s expected to remain at £3,000 in 2025/26.
You only pay CGT on gains above this threshold. For example, if you sell shares held outside an ISA and make a gain of £5,000, only £2,000 of that would be taxable.
CGT rates are:
- 10% for basic-rate taxpayers
- 20% for higher- and additional-rate taxpayers
Higher rates apply to gains on residential property that isn’t your main home.
You can use the CGT allowance to manage your investment withdrawals and reduce your tax bill. For example, you might sell part of a holding each year to stay within the allowance.
As always, if in doubt, talk to an IFA for more information, as every situation is different, and you shouldn’t rely on general information for complex tax matters.
Don’t forget the marriage allowance
If you’re married or in a civil partnership, and one of you earns less than the personal allowance, you might be able to transfer up to £1,260 of unused allowance to your partner.
This is called the marriage allowance and can reduce your tax by up to £252 a year. You can even backdate your claim by up to four years if you’re eligible.
General investment accounts: Be tax-aware
If you’re investing outside a pension or ISA, it’s often through a general investment account (GIA). But remember – GIAs don’t offer any tax protection. You may end up owing tax on dividends, interest, and capital gains.
That makes it especially important to:
- Use your allowances each year
- Consider the type of assets you hold in a GIA
- Plan withdrawals to minimise tax
- Talk to an expert if there’s anything you’re not sure about
Summary: Smart ways to make the most of your allowances
Here are a few tips to wrap things up:
- Use your ISA allowance each year if you can
- Don’t forget your pension. It offers upfront tax relief and long-term growth
- Be aware of smaller allowances: savings, dividends, and capital gains
- Review your total income to see how tax bands and allowances affect your situation
- If you’re married, see if the marriage allowance applies to you
- Keep an eye on changes for 2025/26. Even small tweaks can have a big impact.
Investing through tax-efficient accounts like ISAs and pensions doesn’t just reduce your tax bill – it can help you keep more of your money working for you over time.
And if you’re not sure what you’re entitled to, tools like the one offered by InvestEngine can help you check your tax relief status in minutes.
The end of the tax year can creep up fast. Reviewing your investments regularly and making the most of your allowances could save you thousands over the years. It’s well worth doing.
For more insights and tools to help you make the most of your investments, there’s lots more on the InvestEngine blog – or have a look at our Education Series on YouTube.
There’s also a handy checklist to help you navigate the end of the tax year.
Caught in the 60% tax trap? This article is for you.
Want to know how to make the most of your remaining ISA allowance?
Fees can have a huge impact over time. Learn more here.
Frequently asked questions
Can I open more than one ISA in the same tax year? Yes – from April 2024, you can open and contribute to multiple ISAs of the same type within the same tax year. Just make sure your total ISA contributions don’t exceed the annual allowance of £20,000.
Do all providers allow you to open more than one ISA of the same type? No – even though the rules have changed, not all ISA providers have adopted the new flexibility. Some still only allow one ISA of each type per tax year, so check before opening a second account.
What is a flexible ISA? A flexible ISA allows you to take money out and replace it within the same tax year without using up more of your ISA allowance. Not all providers offer this feature, so you’ll need to ask your ISA provider.
How do I know if my pension contributions are eligible for tax relief? Most contributions to registered pensions qualify for tax relief. Basic-rate tax relief is added automatically, but higher and additional rate taxpayers may need to claim extra relief via their self-assessment tax return.
What happens if I exceed my pension annual allowance? If you contribute more than your available pension allowance (including carry forward), you may have to pay a tax charge on the excess. A financial adviser can help you calculate what you’re allowed to pay in.
Is it worth using small allowances like the personal savings allowance and dividend allowance? Yes – even small allowances can add up over time and help reduce your tax bill. Using your ISA or pension can offer additional protection if your savings or investments grow.
How often should I review my allowances? At least once a year – ideally before the end of the tax year in early April. It’s a good habit to review your finances and ensure you’ve made use of all your available allowances.
What tax-free allowances could I benefit from? Some of the main tax-free allowances include:
- Your personal allowance (£12,570)
- The ISA allowance (£20,000)
- Pension annual allowance (up to £60,000)
- Personal savings allowance (up to £1,000)
- Dividend allowance (£500)
- Capital gains tax allowance (£3,000)
- Marriage allowance (transfer up to £1,260) These can all help reduce the amount of tax you pay on your income and investments.
What are my main tax-free savings options in the UK? Your main options include:
- Cash ISAs (tax-free interest)
- Stocks and shares ISAs (tax-free growth and income)
- Lifetime ISAs (for first home or retirement)
- Innovative Finance ISAs (peer-to-peer lending)
- Pensions (tax relief on contributions and tax-free growth)
Each has different rules and benefits, so the right mix for you will depend on your goals and financial situation.
Important information
Capital at risk. The value of your portfolio with InvestEngine can go down as well as up and you may get back less than you invest. ETF costs also apply.
This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.
Tax treatment depends on personal circumstances and is subject to change, and past performance is not a reliable indicator of future returns.