How to make the most of your tax-free allowances

Tax-free allowances let you shield some of your savings and investments from the taxman.

For instance, you can put £20,000 into tax-sheltered ISAs each tax year, and you won’t have to pay tax on any interest or investment returns earned on it.

Each allowance has its own rules, and they can be difficult to keep track of – but making the most of them each tax year can mean you keep more of your money.

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Isabella Galliers-Pratt, senior investment director at Rathbones, said: “Once you’ve used ISA and pension allowances, the question becomes: where does my next pound go? The right route depends on time horizon, risk tolerance and personal tax circumstances.

ISA allowances

An individual savings account (ISA) is a savings or investment account where you do not have to pay tax on the interest or returns you make.

All adults in the UK can put up to £20,000 a year into ISAs. There are four types, but the main two are the cash ISA and the stocks and shares ISA.

You don’t have to pay tax on the interest you earn in a cash ISA. This differs to traditional savings accounts where the interest can be taxed if it exceeds savings allowances.

Stocks and shares ISAs also differ from General Investment Accounts (GIA) as the investments you hold in an ISA are not liable for capital gains tax or dividend taxes.

This makes ISAs incredibly useful for people who want to reduce the amount of tax they pay on their savings and investments.

While you can put up to £20,000 into ISAs each tax year, the allowance operates on a “use it or lose it” basis, meaning the moment a new tax year starts, you can no longer use the previous year’s allowance.

That’s why it’s recommended you use as much of your ISA allowance as you can each tax year. This will protect your interest or returns from the taxman.

Savings allowance

While interest earned on savings not held in an ISA is taxable, you can earn some tax-free.

For instance, you can earn a certain amount of interest tax-free via the personal savings allowance (PSA). The threshold is £1,000 of interest for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers have no PSA.

You do not have to pay any tax on income, including from savings interest, that falls within your £12,570 tax-free personal allowance.

If you have an income of less than £17,570 a year, you also get an additional tax-free savings allowance known as the starting rate for savings.

This is worth a maximum of £5,000 and you lose £1 of it for every £1 you earn above the personal allowance.

Once the interest earned goes above the threshold for your tax band, you will start to pay tax on your savings.

You can do a rough calculation of how much interest you will get in one year by taking the interest rate of your account and working out what that is as a percentage of your savings.

If this ends up being higher than your savings allowance, consider ways to reduce your tax liability – potentially by moving your savings into an ISA or using another allowance.

If you’ve used up your savings allowances, you could consider Premium Bonds, a savings vehicle run by the government-owned National Investment and Savings (NS&I).

Unlike savings accounts, Premium Bonds do not pay a set level of interest. Instead, you could potentially win tax-free prizes, worth between £25 and £1 million, in the monthly prize draws.

Each £1 you hold in Premium Bonds gives you one entry into the draw, and you can save up to £50,000 in them. As the prize draw is random, prizes are not guaranteed, but the more you have saved in them, the more likely you are to win.

Pensions allowance

Most people can put a maximum of £60,000 into their pension each year while benefitting from tax relief from the government.

This is lowered to £10,000 if you start to take your pension in multiple lump sums (a one-off lump sum of up to 25% does not count), take an annual income from your pension, or take your entire pension in one go. This is known as the Money Purchase Annual Allowance (MPAA).

The annual tax-free total includes contributions made by you, your employer, and the tax relief from the government.

You can also make use of unused allowances from the previous three tax years, meaning if you haven’t put any money into your pension for the past three years, you could put up to £240,000 into your retirement pot in a given tax year.

Galliers-Pratt at Rathbones said: “If you’ve only maximised your ISA, it’s worth taking another look at your pension. The annual allowance is £60,000, and the three-year carry forward rule allows unused allowances from previous tax years to be topped up in one go. For higher earners, the associated tax relief can be particularly valuable.”

Capital gains tax allowance

Capital gains tax (CGT) is a tax you pay on the profit you make when selling assets. In terms of investments, you may need to pay some when you sell your stocks and shares held in a General Investment Account (GIA).

All UK adults have a tax-free CGT allowance of £3,000 regardless of their tax band.

It can be difficult to predict whether the gains you realise from your investments will breach this allowance as how much your investments will grow cannot be perfectly calculated.

To be on the safe side, consider transferring your investments into an ISA to ensure they are not taxed.

One way to do this is through a process called “Bed and ISA”, where you sell investments held in a GIA and buy them back immediately inside an ISA. Most major platforms are able to do this for you, but you can do it yourself if you wish.

You may have to pay some tax when transferring the investments as you are selling them and then buying them back, but they will be shielded from any further tax once they are inside the ISA.

If your ISA allowance is already used up, there are some things you can do. You only need to pay CGT at the point of sale, meaning if you are not in a rush to get the money, you can wait until the next tax year to sell your shares when the allowance refreshes.

Galliers-Pratt said: “GIAs offer flexibility, but income and gains are taxable. Making full use of annual capital gains and dividend allowances, and carefully timing realised gains, can help keep tax bills under control.”

Dividend allowance

UK adults also get a dividend allowance that allows you to be paid up to £500 in dividends before paying tax.

Dividends above this threshold are taxed at 10.75% for basic rate taxpayers, 35.75% for higher rate payers, and 39.35% for additional rate payers.

The exception to this is if any dividend income falls within your £12,570 personal allowance, which is not taxed.

You do not pay any tax on dividends paid from investments in your ISA, meaning if you are expecting more than £500 in dividends a year it may be a good idea to prioritise holding these investments in your ISA.

Transfer money to spouse

There are certain tax benefits available if you’re married or in a civil partnership and you share your finances.

Galliers-Pratt said: “Couples can effectively double their ISA, dividend and CGT allowances. Transfers between spouses are typically tax-free, making this a simple but often overlooked planning opportunity.”

Every UK adult gets the allowances listed above – they are given to an individual, not a family or household.

That means that if you share your finances you can effectively enjoy a £40,000 ISA allowance, meaning you can protect more of your savings or investments from the taxman.

As for capital gains tax or dividend tax, you can carefully plan who holds which investments to keep money within the tax-free allowance. The same principle can be applied for cash savings.

If you or your spouse have an income below the £12,570 personal allowance and the other is a basic rate taxpayer, you can also get up to £256 worth of tax relief a year through the marriage allowance. This allows one partner to transfer £1,260 of their personal allowance to the other, which can mean the couple reduces the amount of income tax they pay overall.

IHT gifting allowance

Each tax year, the ‘annual exemption’ means an individual can give away up to £3,000 worth of gifts without them being added to the value of their estate for inheritance tax purposes.

Any unused part of this allowance can be carried forward to the next tax year, but only for one year. That means if you did not give any gifts in the previous tax year, you could give £6,000 in gifts this year.

The small gift allowance allows you to give up to £250 per person each tax year as long as you have not used another allowance on them. Birthday and Christmas gifts given from your regular income are also exempt from inheritance tax.

You also get gift allowances for weddings and civil partnerships. It is £5,000 if the recipient is your child, £2,500 if they are your grandchild or great-grandchild, and £1,000 if they are anyone else. The wedding/civil partnership allowance can be used alongside the £3,000 annual exemption.

Regular payments to another person (for example to help with the living costs), are exempt from inheritance tax as long as you can afford the payments after your own living costs, and they are paid from your regular monthly income. This can be used along with any other allowance apart from the small gift allowance.

Any gifts beyond these allowances are subject to the ‘seven year rule’. This states that assets given away are still counted as part of your estate for inheritance tax purposes, and therefore potentially taxed, unless seven years have passed.

Children’s ISA allowance

If you have children, you can pay into their Junior ISA (JISA) and it will be protected from tax.

You can put a maximum of £9,000 into a JISA each year, but be aware that the money held in a Junior ISA is legally your child’s.

Consider Venture Capital Trusts (VCTs)

If you have used up all of your available allowances and still want to invest in the most tax-efficient way possible, you could consider looking into Venture Capital Trusts (VCTs) or the Enterprise Investment Scheme (EIS).

Both these schemes are designed to encourage investment into early-stage companies in the UK by offering tax relief, but they can be complicated and riskier than traditional investments so it is important to know how they work before you invest in them.

In the 2026/27 tax year, you can get 20% tax relief on investments through VCTs (down from 30% in the 2025/26 tax year) and 30% relief on investments through the EIS.

Galliers-Pratt said: “VCTs and EIS continue to attract wealthier investors seeking tax advantaged exposure to UK growth companies. Risk, time horizon and complexity vary significantly, so suitability should drive decisions.”