Whilst the calendar year of course runs from January to December, the tax year is different. It runs from 6th April to 5th April the following year. This is an important difference when it comes to governmental fiscal announcements. For example, departmental budgets and spendings are often determined by tax year. Similarly, state pensions rise each tax year.
Government-stipulated annual allowances for some tax-free saving opportunities also renew each tax year. That’s why at this time of year we like to remind you to complete your tax year end checklist. This includes ensuring you have maximised your savings within the allowances before they renew.
ISAs and pensions have tax-free annual allowances, enabling tax-free savings opportunities. In this blog post, we’ll explain more about these allowances, along with other ways to maximise tax-efficient savings opportunities. We will also discuss how Willday Wealth Management can help you make the most of your allowances.
Individual Savings Accounts (ISAs)
There are four types of ISA available: Stocks and Shares ISAs, Cash ISAs, Lifetime ISAs and Junior ISAs. Each ISA type has its own annual allowance.
Cash ISAs and Stocks and Shares ISAs
Cash ISAs and Stocks and Shares ISAs currently have a combined annual allowance of £20,000 per tax year. This can be split across both types of ISA, and represents how much can be saved or invested each tax year, with no tax due on fund growth.
Upcoming changes
From the 2027-28 tax year, the allowance for these ISAs is set to change. From April 2027, the £20,000 annual allowance will remain, but only £12,000 of this may be saved in a Cash ISA. The remainder of the allowance is ringfenced for Stocks and Shares ISA investment. This change will apply to anyone under 65 years of age. Those over 65 will continue to have the same £20,000 allowance across Stocks and Shares ISAs and Cash ISAs with no restrictions.
Lifetime ISAs
A third form of ISA is a Lifetime ISA. These may be opened by anyone between the ages of 18 and 39. Investments may be made until the individual is 50. The purpose of this ISA is to put the invested funds towards the purchase of a first home up to the value of £450,000. Alternatively, it can be invested for retirement after the age of 60. The annual allowance for a Lifetime ISA is £4,000. This forms part of the overall £20,000 ISA allowance previously mentioned. The government will add 25% to the invested amount each tax year. If contributions are maximised and the full allowance of £4,000 is invested, an additional £1,000 will be added by the government.
Should the Lifetime ISA funds be withdrawn and used for a purpose other than the purchase of a first home or retirement, it will be subject to a penalty.
Junior ISAs
A Junior ISA may be opened on behalf of a child under the age of 18 by their parent. The annual allowance for a Junior ISA is £9,000 per year, which falls outside the £20,000 allowance. This Junior ISA allowance is per account, no matter who pays into it. Funds invested in a Junior ISA are only accessible once the child turns 18. Once they turn 16, though, they gain control of the account.
You can find out more about how Junior ISAs can give your child a financial head-start in our previous blog post.
How our team can help you
The Willday Wealth Management team will build an investment portfolio with you for your Stocks and Shares ISA. We’ll build it based on your financial goals and invest your money in a way that best suits your needs. The team will offer help and guidance throughout. We may, for example, suggest investing in more than one Stocks and Shares ISA to suit different short- and long-term savings goals. The combined allowance for any ISA paid into in a tax year is £20,000.
Pensions
The annual allowance for pension contributions is up to £60,000, in order to take advantage of tax relief. Basic rate taxpayers will automatically receive 20% tax relief on contributions. Higher- and additional-rate taxpayers may receive up to 45% tax relief. This must be claimed back through your annual tax return.
Those with an income of less than £60,000 will not be able to contribute the full allowance each year. Instead, your pension annual allowance will be the equivalent of your ‘relevant earnings’. This includes your employment income, trading income and income from furnished holiday lettings. For example, if your combined earnings from these sources is £45,000, this will be your pension annual allowance.
For those with an income of more than £200,000 per year, you may have a lower tax-free allowance too. This is known as a tapered annual allowance. You can find out more about this and the potential tax implications for you, in our blog post from earlier this year.
Whilst ISA allowances may not be carried over if they remain unused, pension allowances can. Up to three years of allowance may be carried forward. Any pension contributions above your annual allowance (including any applicable carry-forward), is liable to income tax. This will be charged at your marginal rate of 20% for basic rate, 40% for higher rate or 45% for additional rate taxpayers.
How our team can help you
If you’re looking for a private pension that is tax-efficient and globally diversified, contact us. Your personal investment consultant will ensure you get the most from your pension and overall investment plan*. We’ll ask you about your plans for your retirement, and we’ll build a pension portfolio that will help you achieve these dreams. By telling us when your target retirement age is, we can manage your portfolio accordingly to reduce the risk level of your investments as this date approaches. Plus, you can transfer existing pensions to a Willday-managed portfolio too! Call us on 0116 222 0119 or email hi@willdaywm.co.uk to get started!
Further tax-efficient savings opportunities
In addition to ISAs and pensions, you can take advantage of further tax-efficient savings opportunities too. For example, if you save into a regular savings account, you may be able to earn interest without paying tax on it. Basic rate taxpayers can earn up to £1,000 in interest each tax year, tax-free. Higher-rate taxpayers may earn up to £500 in interest per tax year for the same benefit. This is known as your Personal Savings Allowance. Additional-rate taxpayers have no tax-free allowance on interest earned in regular savings accounts. Any interest earned above the tax-free threshold will be added to your income amount, and taxed accordingly.
If you are a director in a business, you will have a tax-free dividend threshold per tax year. In the current year, this is £500, and this is set to continue at this rate in the 2026-27 tax year. Any dividends taken over this amount are subject to tax. From April 6th, the start of the new tax year, an extra 2% tax will be applied. This means that basic rate taxpayers will pay 10.75% on dividends taken above the tax-free threshold. Higher-rate taxpayers will pay 39.35% on dividends taken above the threshold, from the new tax year.
So, what do you need to do before the new tax year?
We’ve put together a short checklist for you to complete before the current tax year ends.
- Check how much you have invested so far this year in ISAs and pensions
- Top up your ISAs and pensions to your annual allowance for each, if funds allow. This will make sure you’re maximising tax-efficient opportunities available to you.
- Look at your finances throughout the year. Could you afford to set up regular contributions up to the allowance threshold for your ISAs and pensions? The longer your money is invested for, the greater the opportunity for growth*. Therefore saving regularly through the year instead of in a lump sum before tax year end could be more financially beneficial for you.
- If you are a director of a business with sufficient profit and funds to cover corporation tax, have you drawn dividends up to your tax-free limit?
Each of the allowances mentioned in this blog post will re-set on April 6th. You’ll then be able to start investing within fresh allowances for the next year. Confused by the allowances and what amounts apply to you? Our team will help you make sense of the allowances along with any tax-efficient opportunities. Give us a call to speak to one of our knowledgeable experts, and start investing your funds to work hard for you.
* With investing, your capital is at risk and you may get less than what you invested.
