Are you taking advantage of your tax-free allowances?
- Reeves Independent
- Sep 15
- 8 min read
When it comes to managing your finances, every penny saved is a penny earned - and one of the most effective ways to keep more of your money is by making full use of your tax-free allowances.
From ISAs and pensions to capital gains and dividends, there are various tax-efficient opportunities that can help you grow your wealth without paying more tax than necessary. However, many people overlook or underutilise these allowances, potentially leaving money on the table.
In this article, we’ll break down the key tax-free allowances available, how you can make the most of them, and why a little financial planning today could lead to big savings in the future. Let’s ensure you’re not missing out!
Pension contributions
The first step on your tax planning journey is to ensure you're maximising your pension contributions. HMRC offers generous reliefs that can significantly boost the growth of your pension pot.
Basic rate taxpayers receive 20% pension tax relief, meaning if you contribute £20,000 to your pension, you’ll get an additional £5,000 from the taxman in the form of income tax relief. Higher rate taxpayers enjoy a 40% relief.
The amount you can contribute to your pension ranges from £3,600 to £160,000, depending on various factors. If you qualify, unused allowances from the previous three years can be carried forward. Additionally, make sure to take full advantage of your employer’s contributions, whether through matched contributions or salary sacrifice.
If you don’t use them, you’ll lose them – speak to Reeves Independent before the tax year is out to ensure you are making the most of your allowances.
Personal Allowance and Personal Savings Allowance
Most individuals benefit from a Personal Allowance, which remains at £12,570 for the 2025/26 tax year. This is the amount of income you can receive before paying Income Tax.
In retirement, your income may come from multiple sources, including the State Pension, private pensions, rental income, or part-time earnings. All of these count towards your Personal Allowance, and once your total income exceeds £12,570, any additional earnings become taxable.
When it comes to savings and investments, the rules differ slightly. Even if your income exceeds the Personal Allowance, you may still be able to earn tax-free interest under the Personal Savings Allowance.
Basic rate taxpayers (20%) can earn up to £1,000 in interest tax-free. Higher rate taxpayers (40%) have a reduced allowance of £500. Additional rate taxpayers (45%) do not receive a Personal Savings Allowance.
Additionally, if your total income (excluding savings interest) is below £12,570, you may qualify for the starting rate for savings, allowing up to £5,000 in tax-free interest. This can be particularly beneficial for those with lower overall taxable income.
Understanding these allowances can help you optimise your tax-free earnings and ensure you're making the most of your income sources.
Pension Annual Allowance
The Pension Annual Allowance is the maximum amount you can contribute to your pension each tax year while still benefiting from tax relief. For the 2025/26 tax year, this allowance remains at £60,000.
You can contribute up to 100% of your annual earnings, capped at £60,000, into a pension and receive tax relief at your marginal rate.
Even if you don’t have earnings, you can still contribute up to £3,600 gross (£2,880 net) and receive basic rate tax relief. Furthermore, employer contributions also count towards this limit.
Be careful, because if your total contributions - including employer contributions - exceed £60,000, the excess is subject to a tax charge.
You may be able to carry forward any unused allowance from the previous three tax years, provided you were a member of a pension scheme during those years.
You must also bear in mind the Tapered Annual Allowance. If your adjusted income (total income including pension contributions) exceeds £260,000, your annual allowance may be gradually reduced to a minimum of £10,000.
Making the most of your Pension Annual Allowance can significantly boost your retirement savings while providing valuable tax benefits.
ISA Allowances
You can save up to £20,000 each tax year in Individual Savings Accounts (ISAs), and any interest earned within an ISA remains completely tax-free. However, ISAs don’t just offer tax-free savings – they also provide tax advantages for investments.
Any interest, dividends, or capital gains from investments held within an ISA are not subject to tax.
This makes ISAs a valuable tool for long-term saving and investment growth.
One strategy for investors is known as ‘bed and ISA’, which involves selling assets, such as funds or shares, held outside of an ISA and reinvesting them within an ISA. This ensures that any future investment growth and income remain tax-free.
However, it’s important to be aware that there may be transaction fees when selling and repurchasing investments. If the sale exceeds the Capital Gains Tax (CGT) allowance (which is £3,000 for 2025/26), it could trigger a tax charge.
Furthermore, if you’re looking to save for a child or grandchild, a Junior ISA (JISA) is an excellent option. These accounts must be opened by a parent or legal guardian, but family members, including grandparents, can contribute.
The annual contribution limit for a Junior ISA is £9,000 and the child can access the funds once they turn 18. This could provide a useful lump sum for university fees, a first home, or other major life expenses.
By making the most of your ISA allowances, you can grow your savings and investments tax-efficiently, helping to secure your financial future or support loved ones.
Capital Gains Tax (CGT) and Dividend Allowance
Making a profit on your investments is always rewarding, but Capital Gains Tax (CGT) can take a portion of those gains.
For the 2025/26 tax year, CGT rates are set at 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers. On residential property (not your main home), these rates increase to 18% and 24%, respectively.
You can realise gains up to £3,000 from the sale of assets before incurring Capital Gains Tax. Gains above this threshold are taxed at rates depending on your income and the type of asset.
You can receive up to £500 in dividends tax-free. Dividends exceeding this amount are taxed based on your income tax band.
Inheritance Tax Allowances
Effective Inheritance Tax (IHT) planning allows you to make the most of several allowances each year, helping to reduce a future IHT bill while supporting your loved ones financially.
Firstly, there are annual exemptions & gifting allowances. This is a £3,000 annual exemption – you can give away this amount each tax year without it being subject to IHT.
Additionally, you can make as many gifts of up to £250 per person as you like.
Likewise, as a wedding gift, you can give up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else, free from IHT.
While these allowances may seem small, over time they can significantly reduce the size of your taxable estate, offering financial support to younger family members.
If you want to make larger gifts, you may be able to do so using the ‘normal expenditure out of income’ exemption.
To qualify, the gift must come from your regular income, not savings or capital. It must be part of a consistent pattern of giving and not affect your standard of living. If these conditions are met, the gift is immediately exempt from IHT.
Many people use this exemption to contribute toward grandchildren’s childcare, school fees, or other ongoing support.
Keeping records is essential. Whatever allowances you take advantage of, keeping clear records is crucial. Without proper documentation, HMRC could challenge any claims, potentially leaving your beneficiaries with an unexpected tax liability.
By strategically gifting and making use of allowances, you can reduce your IHT exposure and pass on more of your wealth to your loved ones.
Marriage Allowance
If you’re married or in a civil partnership, you may be able to reduce your household’s overall tax bill through the Marriage Allowance. This allows one partner to transfer £1,260 of their Personal Allowance to the other, potentially saving up to £252 in Income Tax each year.
So, how does it work? Foremost, the partner transferring their allowance must be a non-taxpayer, earning below the Personal Allowance (£12,570). The receiving partner must be a basic rate taxpayer, earning between £12,570 and £50,270.
Once applied, the Personal Allowance of the transferring partner is reduced to £11,310, while the recipient's allowance increases to £13,830 before they start paying tax.
Marriage Allowance is particularly useful for couples where one partner earns below the Personal Allowance threshold, such as those who are retired, working part-time, or taking a career break.
It’s free to apply, and you can even backdate claims for up to four years, potentially securing additional savings.
Rent-a-Room Scheme
If you’re considering renting out a spare room in your home - whether to a lodger, Airbnb guest, or bed and breakfast visitor - the Rent-a-Room Scheme allows you to earn up to £7,500 a year tax-free from furnished accommodation.
The scheme is open to homeowners and tenants renting out furnished rooms in their main residence, applying to long-term lodgers, Airbnb guests, or bed & breakfast stays.
However, it is not applicable if you’re renting out space as an office, business premises, or a storage unit.
If your rental income is £7,500 or less, you don’t need to file a tax return - just keep records of what you earn.
If you earn more than £7,500, you must complete a self-assessment tax return, either claiming the £7,500 tax-free allowance, or declaring rental income as a business, deducting expenses before tax is calculated.
This scheme is a straightforward way to generate extra income from your home while benefiting from generous tax relief.
For free and impartial guidance on allowances, MoneyHelper offers a range of helpful articles to support you. Click the link to get started!
Your bit on the side… trading and property allowances
The rise of digital platforms like Airbnb, eBay, and Etsy has made it easier than ever to earn extra income from a part-time role on the side. From selling handmade goods to renting out equipment, there are countless ways to bring in additional cash.
You can earn up to £1,000 tax-free from property rental. You also have a £1,000 trading allowance for buying and selling goods, freelancing, or offering services. If your income stays below these limits, you don’t need to declare it to HMRC - just keep records of what you earn.
What happens if your side hustle grows bigger? Well, if your earnings exceed £1,000, you have two options. You can either use the £1,000 tax-free allowance and pay tax on anything above it, or you can register as self-employed with HMRC and deduct business expenses to reduce your taxable income.
Whether you're making a little extra on the side or turning a passion into a full-time business, knowing your tax-free allowances can help maximise your profits.
Make the most of your allowances with Reeves Independent!
Understanding and utilising your tax-free allowances is key to maximising your wealth and securing your financial future. Whether you’re making the most of your Personal Allowance, ISAs, pensions, or side hustle earnings, having a clear tax strategy ensures you keep more of your money working for you.
At Reeves Independent, we specialise in helping individuals navigate tax-efficient planning, ensuring you make informed decisions to build and protect your retirement savings. Our expert team can review your allowances, optimise your investments, and create a tax strategy tailored to your goals.
Book your free review today!
A well-planned tax strategy can make a significant difference in your financial future. Book a free, no-obligation review today with Reeves Independent, and let’s help you achieve your retirement goals with confidence.
