Inheritance, income and capital gains tax – how to cut your tax bill in 2025

From new presidents and prime ministers to trade wars and the future of inflation and interest rate cuts, a lot has changed in the last year.

However, one thing that hasn’t changed is that we’re still paying more tax than we need to.

Thanks to frozen tax thresholds and falling allowances, income, inheritance and capital gains tax bills have been sky-high.

The fact we’re also only half-way through these frozen thresholds mean things aren’t going to get any easier – especially when you consider that from 2027 defined contribution pensions are expected to be included in working out IHT bills.

So, what can you do to pay less income, inheritance and capital gains tax?

This article isn’t personal advice. If you're not sure if a course of action is right for you, ask for financial advice.

Remember, unlike cash all investments and any income from them can rise and fall in value, so you could get back less than you invest. ISA, pension, and tax rules can change, and benefits depend on your circumstances.

How to pay less inheritance tax (IHT)

IHT receipts for April were £97mn higher than they were at the same point last year. This is partially due to a small number of higher than usual payments.

But, over the course of the year, frozen thresholds will continue to play their role in pushing the IHT tax take ever higher.

Currently, only a small number of estates actually pay IHT. This is because assets can pass between spouses IHT free.

In addition, they can also inherit any unused portion of their spouse’s nil rate bands.

If they choose to pass their family home down to children or grandchildren, using the residential nil rate band, they can also pass as much as £1mn down without having to pay any IHT.

It’s still important to be aware of any looming IHT you might have to pay down the road though, and then plan for it wherever possible – especially as defined contribution pensions are expected to come into scope from 2027.

Here are some of the easiest ways to cut your IHT bill.

To start with, if you gift to a loved one it will pass out of your estate for IHT purposes after seven years, no matter what its value.

However, there are also a number of gifts you can make which are immediately exempt from IHT.

• Every tax year you can gift up to £3,000 without it being counted as part of your estate. You can also carry forward any unused annual exemption to the following tax year, but only for one year. This is available per person, so a couple could use their combined annual exemptions

• Wedding or civil ceremony gifts are exempt up to £1,000 per person, or up to £5,000 for a child and £2,500 for a grandchild or great-grandchild

• Gifts to charities (UK registered) and political parties are usually immediately exempt as well

You can also give up to £250 per tax year to any number of people, provided they haven’t received a gift from you which uses another exemption. Although these exempt amounts might seem relatively small, gifting in these ways over time can add up to a big difference.

For those with larger potential liabilities the ‘gifting out of surplus income’ rules will come in handy.

However, you’ll need to make careful records to demonstrate the gifts are regular, come out of your income, and that making them doesn’t disrupt your standard of living.

You’ll also need to make careful notes of your gifting to demonstrate you’ve met these rules, otherwise your loved ones could face a tax bill.

Gifting while you’re alive has the benefit of you actually being able to see your loved ones enjoying your gift.

Just make sure you don’t get so worried about reducing your IHT bill that you give away too much too early and potentially leave yourself struggling later on.

How to pay less income and capital gains tax

With annual allowance cuts and frozen thresholds taking their toll, this year we again paid an enormous amount of income and CGT.

Income tax usually sees a bump in April, and this year was no exception.

At £29.8bn, it was up 27% from March.

This rise in tax has been magnified by fiscal drag, which means that every successive pay rise pushes more people into new tax thresholds, hiking their tax bills. It meant we forked out 9% more in income tax than April last year.

The fact that these frozen thresholds are in place until 2028 means this pain is far from over, so it’s going to be vital not to pay more than our fair share.

While capital gains tax receipts fell between March and April, the picture isn’t much better – we still paid a colossal £191mn.

So, how can you cut both income and CGT bills this year?

Make the most of your ISA allowance

Each tax year you get an ISA allowance. This tax year the government is offering the chance to squirrel away up to £20,000 – completely free of UK tax.

Investing through a Stocks and Shares ISA means you won’t have to pay UK tax on any gains or income from these investments. And if you save through a Cash ISA, you won’t have to pay tax on any interest.

If you make interest above your personal savings allowance (£1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers), you’ll pay tax on the interest with a normal savings accounts.

Make the most of your pension allowance

When your money is in a pension, like the Self-Invested Personal Pension (SIPP), it can grow free from UK income and capital gains tax (CGT).

You can get tax relief from the government on what you put in too – boosting your pension pot even further.

As long as you're a UK resident under 75, you can usually pay into a pension as much as you earn, up to £60,000 a year for most people, and get basic-rate tax relief (20%).

Pensions can also be a particularly valuable tool for those paying higher rates of tax or nearing an expensive threshold.

If you pay higher-rate tax (40%), you can claim up to an additional 20% in tax relief through your tax return. If you pay additional-rate tax (45%), you can claim back up to an extra 25%.

So, basic-rate taxpayers can turn £80 into £100 with 20% tax relief.

And if you’re a higher earner, you can claim up to an additional 20% or 25% through your tax return – meaning £100 in your pension could cost as little as £55.

Just remember, different income tax rates and bands apply for Scottish taxpayers. You also usually can’t access your pension until 55 (rising to 57 from 2028).