How to plan your finances effectively for the new tax year

With the new tax year underway, it's a great time to review and adjust your financial plans to make the most of the allowances and limits set by HMRC. Here are some key steps to help you plan your finances effectively for the 2025/26 tax year.

1. Understand your personal allowance

The personal allowance for the 2025/26 tax year remains at £12,570. This is the amount of income you can earn before you start paying income tax. If your income exceeds £100,000, your personal allowance decreases by £1 for every £2 earned over this threshold(with no personal allowance on taxable income over £125,140). Knowing how this affects your taxable income is important for effective financial planning.

2. Maximise your ISA contributions

Individual Savings Accounts (ISAs) offer a tax-free way to save or invest. For the 2025/26 tax year, the ISA allowance is £20,000. This means you can save up to £20,000 a year in ISAs without paying any tax on the interest, dividends, or capital gains. If you’re able, you should consider using your full allowance to maximise your tax-free savings.

3. Utilise pension contributions

Contributing to your pension is a tax-efficient way to save for retirement. The annual allowance for pension contributions is £60,000. If your adjusted income is over £260,000 you may be subject to the Tapered Annual Allowance, which could reduce the allowance below this limit. If you have accessed your pension flexibly you may be subject to the Money Purchase Annual Allowance, reducing the allowance to £10,000. Contributions within the limits that may apply to you could receive tax relief. If you have unused allowances from the previous three years, you may be able to carry them forward to increase your contributions for the current year. A financial adviser can help you understand your limits based on your personal circumstance, to allow you utilise the allowances available to you.

4. Take advantage of the Marriage Allowance

If you're married or in a civil partnership, you may be eligible for the Marriage Allowance. This allows you to transfer £1,260 of your personal allowance to your spouse or civil partner if they earn more than you, potentially reducing their tax bill by up to £252. You will need to apply for this allowance if you qualify.

5. Review your investments

Capital gains tax (CGT) applies to the profit you make when you sell certain assets. For the 2025/26 tax year, the CGT allowance is £3,000, with capital gains above this amount being taxable. Reviewing your investments and considering the timing of asset sales can help you stay within the allowance and minimise your tax liability.

6. Consider charitable donations

Donating to charity could provide tax benefits. Under the Gift Aid scheme, donations are increased by 25%, and higher-rate taxpayers can claim additional tax relief. For example, if you donate £100, the charity receives £125, and you can claim back £25 if you're a higher-rate taxpayer. You’ll need to keep records of your donations to claim the appropriate relief.

7. Plan for inheritance tax

Inheritance tax (IHT) planning is essential to help ensure your estate is passed on efficiently. The IHT threshold for the 2025/26 tax year is £325,000. Anything above this amount is taxed at 40%. However, there are various reliefs and exemptions, such as the residence nil-rate band, which can increase the threshold. A financial adviser will be able to support you to explore ways to reduce your IHT liability.

8. Utilise business allowances

If you're self-employed or run a business, there are several allowances and reliefs available. The trading allowance allows you to earn up to £1,000 tax-free from self-employment. Additionally, the Annual Investment Allowance (AIA) lets you deduct the full value of qualifying plant and machinery from your profits, up to a limit of £1 million. Make sure to take advantage of these allowances, if eligible.

9. Review your tax code

Your tax code determines how much tax is deducted from your income. Ensure your tax code is correct to avoid overpaying or underpaying tax. If your circumstances change, such as starting a new job or receiving additional income, notify HMRC to update your tax code accordingly.

10. Seek professional advice

Tax rules and allowances can be complex, and professional advice can help you navigate them effectively. A financial adviser could provide personalised guidance based on your circumstances, helping you make informed decisions and optimise your financial planning for the new tax year. However, for comprehensive tax planning and to ensure compliance with all tax regulations, it is also advised to consult a tax expert. They can offer specialised advice and support to manage tax-efficient savings and address any specific tax-related issues.

By understanding and utilising the allowances and limits for the 2025/26 tax year, you can effectively plan your finances and make the most of the available tax benefits. Regularly reviewing your financial situation and seeking professional advice when needed could help you stay on track and achieve your financial goals.