The tax year runs from 6 April to 5 April the next year. This means that the most crucial UK tax deadline occurs every April.
That’s because there exist various annual allowances and tax reliefs that you need to make use of to legally mitigate your income tax bill and stop taxes devouring your investment returns.
Most of these are ‘use it or lose it’ allowances with a 5 April deadline.
It’s no good bemoaning in June that you should have filled your ISA allocation by 5 April, but you were too preoccupied by the Donald Trump Show or the Six Nations rugby!
No point cursing if you create a £500 capital gains tax liability in July that you might have defused in March!
Ch-ch-changes
Of course you read Monevator. You know this kind of stuff. But it’s still all too easy to overlook something.
Especially when the tax rules keep changing! For example, the capital gains allowance was halved in the 2024-25 tax year to just £3,000.
So let’s run through a checklist of what to think about as the UK tax deadline draws near.
Follow the links in each section to go deeper.
ISA allowance
The annual ISA allowance is the maximum amount of new money you can put each year into the range of tax-free savings and investment accounts that comprise the ISA family.
The ISA allowance for the current tax year to 5 April is £20,000.
You cannot carry forward or rollback this ISA allowance. What you don’t use in the tax year is lost forever.
ISAs are a superb vehicle for growing your wealth tax-free. But the fiddly rules – seemingly made up by a bureaucrat with a grudge against mankind – are subject to change over time.
Watch out for rule tweaks
For example, as of the 2024-25 tax year you can now open multiple ISAs of the same type in the same tax year.
Previously you could only open one new ISA of each type in a tax year.
Note though that you can only contribute £20,000 in total to your ISAs a year – old or new. And it’s down to you to keep track of your running total.
Also, you can still only pay into one Lifetime ISA per year. The maximum contribution here is £4,000. This counts towards your £20,000 annual ISA allowance.
Another change is that you can now make partial ISA transfers – although not all platforms will accept them. (Under the old rules, if you contributed to an ISA and then wanted to transfer the funds to a different provider in the same tax year, you had to transfer all of that year’s ISA contributions).
And another: fractional shares can now be held in a stocks and shares ISAs. They’re listed as ‘fractional interests’ on this page of qualifying investments.
My co-blogger wrote the definitive guide to the ISA allowance.
Pension contributions annual allowance
There is a limit to how much money you can contribute to your pension in a given tax year while still receiving tax relief on those contributions.
It is sometimes referred to as the pension annual allowance.
Despite massive speculation with every Budget, the allowance is still £60,000.
However the rules about inheritance tax and pensions were thrown into the Magimix blender in late 2024:
Note that saving into a pension is mostly a tax-deferral strategy. That’s because you’re eventually taxed on pension withdrawals, unlike money you take out of an ISA tax-free.
In theory this makes ISAs and pensions equivalent from the perspective of tax.
In practice though, the fact that you can also draw a special tax-free lump sum from your pension gives pensions an edge in tax-terms – albeit at the cost of locking away your money for years.
Weigh up the pros and cons of each tax wrapper. We think most people should do a bit of both.
You can reduce your marginal tax rate by making pension contributions, if you can afford to go without the money today. Those on higher-rate tax bands should definitely do the maths:
Personal savings allowance
Under the personal savings allowance:
- Basic-rate taxpayers can earn £1,000 per year in savings interest without having to pay tax.
- Higher-rate taxpayers can earn £500 per year.
- Additional rate taxpayers don’t get any personal savings allowance.
Back when interest rates were very low, these savings allowances seemed quite generous.
But rising rates have changed everything. Even interest on unsheltered emergency funds can now take you over the personal savings allowance and see some of your interest being taxed.
Redo your sums. Higher-rate tax payers might look into holding low-coupon short duration gilts instead. Recently these have offered a lower-taxed alternative to savings interest.
Dividend allowance
As of 6 April 2024, the annual tax-free dividend allowance was reduced to £500.
Dividends you receive within the tax-free dividend allowance are not taxed. But breach the allowance and you’ll pay a special dividend tax rate on the rest, according to your income tax band.
You can avoid the whole palaver by investing inside an ISA or pension.
Capital gains tax allowance
Everyone has an annual capital gains tax allowance, or ‘annual exempt amount’ in the lingo of HMRC.
This allowance was halved to £3,000 from 6 April 2024.
It is (for now) frozen at this level.
Capital gains tax is levied on the profits you make when you sell or transfer most assets. These assets include everything from shares and buy-to-let properties to antiques and gold bars.
You can shield your gains from capital gains tax by investing within ISAs and pensions. Go re-read the relevant bits above if you skimmed them!
EIS and VCT investments
You can also reduce your taxes by investing in Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS).
These vehicles are mostly marketed at wealthy high-earners for whom the large income tax breaks are attractive.
But be aware that these tax reliefs come with all kinds of risks, rules, and regulations.
VCTs
VCTs are venture capital funds run by professional managers who make investments into startup companies.
But somewhat quixotically, VCTs don’t even pretend to try to deliver high venture-style returns for investors.
Instead they aim to return cash via steady tax-free dividends.
You can invest up to £200,000 a year into VCTs. You must hold them for at least five years to keep your 30% income tax relief.
VCT fund charges are invariably expensive, and the returns mostly mediocre – especially if you back out the tax reliefs.
EIS
EIS investing is even riskier. Qualifying companies are usually very young, and many investors buy into them via crowdfunding platforms rather than professional fund managers.
The quality of these EIS opportunities is extremely variable, and information usually scanty.
And while there have been a few big crowdfunded winners, the majority do poorly and often go to zero.
If you’re a baller who buys Lamborghinis before breakfast, you may already know you can put up to £1m a year into EIS investments. (Up to £2m if you’re investing in ‘knowledge intensive companies’).
Again, you can knock 30% of your EIS investment amount from your income tax bill – and there are other reliefs should things go wrong.
You must hold EIS investments for three years to qualify for the tax relief.
Most people shouldn’t put more than fun money into EIS or even VCT schemes, in our opinion. Certainly not unless they’re very sophisticated investors or getting excellent financial advice.
Check in on your tax band and personal allowances
The rate of income tax you pay depends on your total income from all sources. This includes salary, interest, dividends, pensions, property letting, and so on.
You add up all this income to get your total income figure.
You then subtract your personal allowance from the total to see which tax bracket you fit into.
Everyone starts with the same personal allowance, regardless of age:
- This personal allowance is currently £12,570
Your personal allowance may be bigger if you qualify for Married Couple’s Allowance or Blind Person’s Allowance.
However the Personal Allowance goes down by £1 for every £2 of income above a £100,000 limit. It can go down to zero.
For England, Wales, and Northern Ireland, the income bands after deducting allowances are:
| Income Tax Rate | Income band |
| Starting rate for savings: 0% | £0-£5,000 |
| Basic rate: 20% | £0- £37,700 |
| Higher rate: 40% | £37,701-£125,140 |
| Additional 45% rate | £125,141 and above |
Source: HMRC
Note: If your non-savings taxable income is above the starting rate limit, then the starting savings rate does not apply to your savings income.
Scotland has its own income tax rates.
As we’ve seen above, there are further allowances and reliefs for income from certain sources – such as dividends and savings – that can reduce how much of that particular income is taxable.
You can take steps such as making additional pension contributions or having a spouse hold certain assets to further reduce your taxable income or the highest rate of tax you pay.
Don’t make the UK tax deadline into a crisis
Scrambling to exploit these allowances before the tax year ends is not only stressful – it’s financially suboptimal.
If you had cash lying around that you might have put into an ISA earlier in the year, for example, then it could have been earning a tax-free return for months already.
But don’t blush too hard if you find yourself in this position.
Most of us are similar, which is why we wrote this article – and why the financial services industry bombards us with ISA promotions every March.
Try to automate your finances to invest smoothly and intentionally over the year.
And remember that April also brings warmer weather and longer days. Life is about much more than money and taxes!
Save and invest hard, take sensible steps to mitigate your tax bill, and enjoy life like a billionaire with whatever you’ve got leftover.
