As the clock ticks down to 5 April and the end of the tax year, people will be thinking about how to make use of their various tax allowances.
But a lot has happened to allowances and there are some key changes in the coming years that investors and savers should be aware of.
This article isn’t personal advice. If you’re not sure if something’s right for you, ask for financial advice. ISA, pension and tax benefits depend on individual circumstances and rules can change.
Investing for at least five years increases your chances of positive returns compared to cash savings. But investments rise and fall in value, so you could get back less than you put in.
What’s changed for tax allowances?
Annual allowances have seen a lot of change over the years, the pension allowance for instance increased from £40,000 to £60,000 in 2023-24. But we’ve also seen Capital Gains Tax (CGT) and dividend rate allowances slashed. The annual exemption before CGT becomes an issue used to be £12,300, but this was cut to £6,000 in 2023-24, and then cut again to £3,000 the following year.
Dividend tax allowance has also been tinkered with, falling from £2,000 to just £500 in recent years.
What’s happening to the Cash ISA allowance?
In the Autumn Budget, Chancellor Rachel Reeves announced that for under 65s the annual allowance for Cash ISAs is going to be reduced from £20,000 to just £12,000. Meanwhile, over 65s will keep the full £20,000.
But these changes won’t kick in until April 2027. So you have all of next tax year and what’s left of this one to make the most of the £20,000 allowance.
Remember, this change only applies to savings in the Cash ISA. Stocks and Shares ISAs are keeping the £20,000 allowance.
What’s happening to salary sacrifice pensions?
Another big change is to salary sacrifice pensions.
Salary sacrifice is where you exchange part of your salary for a benefit, like pension contributions. This sacrifice is made pre-tax, so there’s less salary when it comes to calculating income tax and National Insurance. The employer will also make National Insurance savings.
It’s a great way of getting more from your pension contributions while maintaining your take home pay. It’s also useful for reducing your income below various thresholds. Some people will want to be careful about crossing the threshold into a higher income tax band or even manage their exposure to the High-Income Child Benefit Charge.
However, from April 2029 National Insurance relief on pension contributions will be restricted to the first £2,000 of contributions made through salary sacrifice. After that both employer and employee National Insurance will apply.
But as these changes do not kick in for a few years, if you’re in a salary sacrifice scheme and you think you will be impacted you have a few more years to make the most of your scheme and build your pension savings.
Make the most of lifelong tax-free growth
If you haven’t used your ISA allowance yet, you can still pay in up to £20,000 before the tax year ends on 5 April. Anything you save or invest is then free from UK income and capital gains tax.
With HL, you can mix and match your approach by adding money to more than one type of ISA.