This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs, please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
A new year is the perfect opportunity for fresh, positive habits. The same applies to a new tax year. As 2025-26 begins, how can you make the most of your allowances – putting more of your hard-earned money and returns back in your pocket?
Below, our Carlisle financial advisers highlight the key areas to consider as you optimise your tax plan in 2025. We hope these insights are helpful. Please contact us if you want to discuss your own financial plan with a member of our team.
Personal Allowance
In 2025-26, most taxpayers can earn up to £12,570 without paying income tax. This is called your Personal Allowance. After this, the basic rate applies. This is levied at 20% on income between £12,571 and £50,270.
If your income is nearing the higher rate threshold (£50,271), take extra care to ensure you’re structuring your income wisely. For instance, if you are a business owner, one option could be to keep your salary below £50,271 and take the rest of your income as dividends (which are taxed at lower rates).
If you are living with a partner or spouse, another option to consider is “income splitting”. For instance, consider two household scenarios. In the first, one person earns £100,000, and the other person earns nothing. In the second, both individuals earn £50,000.
The second household will enjoy more take-home pay even though both households earn the same gross total income. This is because both earners are under the £50,271 threshold (after which, the 40% higher rate applies). If they have children, they will also get more Child Benefit, since both individuals’ income fall under the High Income Child Benefit Charge (HICBC).
If you earn (or are set to earn) between £100,000 and £125,140, be especially careful with your financial planning. Within this income range, the effective tax rate stands at 60% because the Personal Allowance tapers by £1 for every £2 earned over £100,000.
To mitigate this, consider speaking to a financial adviser about using pension contributions to reinstate your Personal Allowance.
ISAs (Individual Savings Accounts)
One of the best ways to protect your interest, capital gains and dividends is through an ISA, which applies a protective tax-free “wrapper” around your investments. Each tax year, you can contribute up to £20,000 to your ISAs.
Up to £4,000 can be placed inside a Lifetime ISA (LISA), and the UK government will apply a 25% “bonus” up to £1,000. This option could be useful for those looking to save for a deposit on a first property or who want to set funds aside for retirement.
Other options include the Cash ISA and the Stocks & Shares ISA. The first could be useful if you have cash savings and your total interest payments are likely to go over your tax-free Personal Savings Allowance (PSA) for the tax year (£1,000 for basic rate taxpayers, or £500 for those on the higher rate).
However, be careful not to place too much of your net worth in cash. Returns are typically comparatively weaker than other assets (e.g. equities), depending on interest rates and market conditions, making them more vulnerable to inflation. Generally, it helps to have 3-6 months’ worth of living costs in easy-access cash ready for emergencies.
Additional funds could be put to harder work elsewhere, perhaps in a Stocks & Shares ISA. Speak with a financial adviser about which asset allocation might suit you based on your unique goals, situation, investment horizon and risk tolerance.
Long-term planning
Pensions offer immediate tax relief and long-term growth. In 2025-26, you can contribute up to £60,000 annually (or 100% of your relevant earnings, if lower) into your pension and receive tax relief at your marginal rate.
As mentioned, pension contributions can reduce your taxable income – helpful for avoiding the 60% effective tax trap or Child Benefit High Income Charge. Additionally, your investments grow tax-free within the pension wrapper.
If you’re eligible, you might also consider carrying forward unused pension allowances from the previous three years for more contributions in this year.
For those looking to optimise their estate planning (e.g. minimising inheritance tax), the nil-rate band remains at £325,000 in 2025-26, with the residence nil-rate band at £175,000, transferable between spouses. This means a couple could potentially pass on £1 million tax-free.
To keep more wealth within the family, consider planning ahead this tax year to maximise reliefs such as annual gift exemptions (£3,000 per person), regular gifts from income and setting up / optimising trust structures (if appropriate).
Invitation
We hope this content gave you more clarity on how to proceed in 2025-26. To discuss your own financial plan, please get in touch to arrange a free, no-commitment consultation with an adviser here in Cumbria.
Your capital is at risk. Investments can go down as well as up. Past performance is not indicative of future results. Tax treatment depends on individual circumstances and may change. This content is for information only and not investment advice. Any decision to invest is the reader’s own. Diversification is key to managing risk. Market volatility affects investment values. Inflation erodes savings. Liquidity risks may prevent quick access to funds.