Making the most of your tax allowances

Everyone is entitled to a personal allowance—the amount of income you can earn tax-free before paying any income tax. The standard personal allowance is £12,570, meaning the first £12,570 of your income is tax-free. The allowance has been frozen at £12,570 and the higher‑rate threshold at £50,270 through 2027/28, and the 26 November 2025 Budget signalled an extension of the freeze to 2030/31 (England, Wales and Northern Ireland).

If your adjusted net income exceeds £100,000, your personal allowance decreases by £1 for every £2 of income above this threshold. This means that by the time your income reaches £125,140, your personal allowance is reduced to zero.

The Marriage Allowance allows you to transfer £1,260 of your personal allowance to your spouse or civil partner if they earn more than you. A successful claim reduces the higher earner's tax bill for the tax year, and if eligible, you can also backdate your claim to previous years.

This is only applicable if you are married or in a civil partnership and are both born on or after 6 April 1935. In addition, one partner needs to be a non-taxpayer (earning less than the personal allowance of £12,750) while the other needs to be a basic rate taxpayer. Higher or additional-rate taxpayers aren't eligible for this allowance.

Capital gains tax (CGT) is charged on the profits made from selling certain assets such as investments or valuable possessions, however there are exclusions.

Each year, individuals have an 'annual exempt amount' of £3,000 that allows them to receive some capital gains tax-free. This allowance remains £3,000 for 2025/26 and 2026/27. Any gains made above the threshold will be taxable.

There are several strategies to mitigate CGT, helping you keep more of your money invested for the future. This is particularly important since the annual CGT exemption cannot be carried forward to the next tax year. However, CGT rules can be complex, and without financial advice, you may end up paying more than necessary.

For example, you could potentially lower your CGT liability by using capital losses to offset your gains. Capital gains and losses realised within the same tax year may be offset against one another, which can reduce the taxable amount.

In addition, unused capital losses from previous years can be carried forward, as long as they are reported to HMRC within four years from the end of the tax year in which the asset was sold.

The personal savings allowance remains unchanged. This allowance enables you to earn interest tax-free on your savings. If your income is less than £17,570, your starting rate for savings is a maximum of £5,000. The other annual tax-free limits are dependent on your marginal income tax rate.

The personal savings allowance applies to interest from bank and building society accounts, savings and credit union accounts, investment trusts, trust funds, government or company bonds, life annuity payments, peer-to-peer lending and payment protection insurance.

If you earn interest above your personal savings allowance, the excess interest is taxed at your usual income tax rate. For example, if you are a basic rate taxpayer, any interest above the £1,000 allowance will be taxed at 20%.

However, savings in tax-free accounts, such as Individual Savings Accounts (ISAs) and some National Savings and Investments accounts, do not count towards the allowance and therefore any interest earned is tax-free.

It is also important to track total income diligently. For example, if you are nearing the threshold for a higher tax band, you could consider other options like investing or saving in ISAs which are normally tax-free.

In addition to the personal savings allowance, there is also a dividend allowance of £500. This means you can earn up to £500 in dividend income tax-free. Any dividend income above this allowance is taxed at different rates depending on your income tax band.

From 6 April 2026, dividend tax rates rise by two percentage points for basic‑ and higher‑rate taxpayers to 10.75% and 35.75% respectively, while the additional rate remains 39.35%.

When you die, if your estate is worth more than £325,000, your estate may be liable to Inheritance tax (IHT) of 40% on anything above this threshold which is known as your nil rate band (NRB).

In addition, providing you leave your main residence to direct descendants, this will be able to pass free from IHT up to £175,000 which is known as the residence nil rate band (RNRB). 

However, if the value of your estate is above £2m, your RNRB will be tapered down by £1 for every £2 over which could result in the complete loss of your RNRB.

Upon your death, if you leave your estate to your spouse or civil partner, this would be exempt from IHT, however it will fall into the survivor’s estate for IHT purposes when they pass away. Also, any unused portion of your IHT allowance can be transferred to your surviving partner, allowing married or civil partnership couples to pass on up to £1 million tax-free: 2 x £325,000 tax-free allowances + 2 x £175,000 resident nil-rate band allowances.

The IHT thresholds were already frozen until 2028 and have since been extended until 2030. While the proportion of estates paying IHT remains small, fiscal drag means more families may be affected over time.

Proposed change to pensions and IHT (from April 2027): the government has proposed bringing some unused pension funds into the scope of the estate for IHT, subject to final legislation and detailed rules. This could influence how families plan withdrawals and death‑benefit nominations.

APR/BPR reforms (from 6 April 2026): The original proposal to cap 100% relief at £1 million has been revised. From 6 April 2026, the combined 100% relief cap for Agricultural Property Relief (APR) and Business Property Relief (BPR) will be £2.5 million per individual, transferable between spouses/civil partners (so potentially £5 million per couple). Value above the cap receives only 50% relief (an effective 20% IHT charge on that portion).

Making the most of your gifting allowance could be an effective way of reducing inheritance tax. You can gift up to £3,000 each year tax-free and gifts to your spouse and/or civil partner are typically unlimited and tax-free. These gifts are excluded from the value of your estate, meaning they won’t be subject to IHT. However, gifts received by the recipient will fall inside their estate for IHT purposes.

If you do not use your full gifting allowance in a tax year, you can carry forward any unused allowance to the next tax year, allowing you to gift up to £6,000 tax-free in that year.

If you would like to gift more than these tax-free IHT allowances then these will also potentially be IHT-free if you live for a further 7 years, if you were to pass away before, they will be considered as part of your estate for IHT purposes.

Pension contributions attract tax relief at your highest marginal rate up to 100% of your UK income when you invest. Your funds will grow tax efficiently, free of income and capital gains tax. If you are employed this is normally automatically done through your payroll. If you’re self-employed basic rate relief is automatically applied from outset. Higher and additional rate taxpayers can claim further tax relief through their self-assessment tax return.

You are limited to how much you can contribute to a pension, this is known as the Annual Allowance which is £60,000 for the 2024-25 tax year. Unused allowance can be carried forward from the previous tax years which can increase the level of contributions. If you earn more than £200K, your Annual Allowance maybe be tapered or reduced with only a minimum £10K allowance available if you income is over £360,000.

Pension contributions can be useful in being able to regain a reduced personal allowance if you are a high earner as referenced earlier or the high income child benefit tax charge.

When you come to withdraw money, 25% can normally be withdrawn tax-free, subject to a maximum of £268,275 across all pensions you hold. This is known as the Lump Sum Allowance. The remainder will be taxed at your marginal rate. This is particularly beneficial if this is a lower tax rate than the amount of relief you received initially.

However, you cannot access the monies before age 55 and from 2028 age 57.

Meeting with a financial adviser can help you determine whether this is the case. It can also help you identify and make the most of other available tax allowances as our advisers can provide tailored strategies to maximise tax-free allowances.

They can also guide you through complex tax rules, helping you avoid costly mistakes and ensuring your financial goals align with the latest changes in tax legislation. Regular reviews with an adviser keep your plan up-to-date and responsive to any new opportunities or challenges.

This article is for information purposes only. It is not intended as tax advice or a recommendation.

Fees and charges may apply.

The value of investments and the income from them can fall as well as rise and are not guaranteed. You might not get back your initial investment.

Tax treatment depends on your individual circumstances and may be subject to change in the future. In this article we refer to the tax rate and thresholds set for England and Northern Ireland, these may differ for the devolved nations of Scotland and Wales. 

Schroders Personal Wealth does not provide personal tax advisory and tax compliance advice, however we can introduce you to a relevant specialist. Schroders Personal Wealth might receive a referral fee from some of the partners we introduce to you.

Cash savings and investments are protected to the value of £120,000 and £85,000 respectively, per person per institution by the Financial Services Compensation Scheme (FSCS). However, the value of investments may fall as well as rise.

The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits which isn’t guaranteed and can go down as well as up. The benefits of your plan could fall below the amount(s) paid in.

In preparing this article we have used third party sources which we believe to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents in relation to specific situations and particular circumstances.