YEAR-END TAX PLANNING: MAKING THE MOST OF THE AVAILABLE ALLOWANCES

With the tax year deadline approaching, the window for making use of the of the available allowances and reliefs is soon to end. The end of the financial year presents a genuine opportunity to minimise tax liabilities and optimise wealth positioning for the years ahead.

ISA allowances

With the increases to dividend tax rates in April 2016 and savings and property tax rates in April 2017 ensuring use of available Individual Savings Account allowances remains a simple but very effective tax savings tools. The current annual ISA allowance of £20,000 can be split between Cash ISAs, Stocks and Shares ISAs and Innovative Financial ISAs with a maximum of £4,000 into a Lifetime ISA. However, from April 2027, for clients under age 65, a new £12,000 limit will apply specifically to Cash ISA subscriptions with the balance available for other ISA types. This means the flexibility to allocate the full £20,000 across cash holdings will no longer be possible for those under 65. We are also aware that HMT are considering whether they need to place restrictions on holding cash in a Stocks and Shares ISA although it is still unclear what these will look like.

It has also been announced that the Lifetime ISA will be replaced with a new type of ISA designed purely to assist with a first home purchase, with a bonus paid on completion. It is unclear when this will happen, but the opportunity still exists to subscribe to the current Lifetime ISA and have the bonus paid shortly after the subscribing. It’s still not clear what will happen to Lifetime ISA accounts once the new ISA type has been launched.

You can easily generate a report of your clients’ current year’s subscription amounts to their Transact ISA under the reports section of Transact Online.

Pension contributions

Tax-year end provides an opportunity to maximise pension contributions, particularly where clients might have the opportunity to carry forward unused allowances from previous years.

In addition to individuals obtaining full tax relief on eligible contributions, member contributions to personal pension plans also work to reduce the member’s income for certain tax allowances (e.g. the tapering of the personal allowance and the high-income child benefit charge) making pension contributions even more tax efficient.

Note, that for client’s making personal contributions, the amount of tax relief available will be restricted to the “annual limit” (broadly speaking the greater of £3,600 (gross) or 100% of relevant UK earnings).  This applies irrespective of whether clients are carrying-forward unused annual allowance from previous tax years.

Clients whose personal contributions exceed the annual limit should request a refund of the excess contributions after the end of the tax year, once their income for the year is known.

Please note that it is not possible to refund contributions in circumstances where clients have only exceeded the annual allowance. If this happens, an annual allowance charge will be due. We do operate scheme pays (including on a voluntary basis) for clients who would like to pay the annual allowance charge using their pension fund.

When thinking about maximising contributions it should be remembered that, from April 2027, pension pots will become subject to inheritance tax for the first time, ending their current IHT-exempt status. This change is due to come into effect next year and so maximising pension contributions should be balanced against broader wealth and estate planning considerations. Large pension contributions might create substantial IHT liabilities for beneficiaries further down the line. This is no reason to avoid using the allowance – pensions remain highly tax-efficient during life – but it warrants more holistic considerations about the timing and scale of pension contributions relative to other planning tools and the client’s overall inheritance tax position.

As with ISAs, the reports section on Transact Online makes it easy to generate details of current and previous years’ contributions to Transact pensions.

Dividend allowance changes

One of the most significant developments for tax planning relates to dividend taxation rates. From April 2026, the basic rate of dividend tax will rise from 8.75% to 10.75%, and the higher rate will increase from 33.75% to 35.75%. Whilst the £500 dividend allowance will remain in place, this increase makes current planning particularly important for investors with dividend-paying portfolios.

For spouses and civil partners, this is an ideal moment to consider whether rebalancing investment ownership in general investment accounts between spouses or civil partners could be beneficial. If one partner is a basic rate taxpayer whilst the other is higher rate, shifting assets that produce investment income to the lower earner will reduce the overall tax paid, creating meaningful tax efficiency.

Capital Gains Tax

With the CGT allowance now at £3,000, the ability for tax year end planning and ensuring utilisation has been curtailed. It is still worth considering using any remaining allowances, particularly if the individual (and or their spouse) still has their full allowance available.

For clients whose portfolios are subject to regular rebalancing, conducting these rebalances towards the end of the tax year could ensure that any unused allowances are used effectively.

Gifting allowances: tax-efficient generosity

The annual gifting exemption of £3,000 allows individuals to give away this sum each year without inheritance tax consequences. This sits outside the estate and the inheritance tax seven-year gifting rules. For spouses and civil partners, this effectively doubles to £6,000 annually. The £3,000 allowance can also be carried forward if it wasn’t utilised in the last tax year, creating a potential £6,000 allowance window.

Beyond annual gifting, the £250-per-person exemption is often underutilised. Individuals can make unlimited gifts of £250 to different people without using their annual allowance – meaning a client could gift £250 to numerous family members and friends within the tax year.

Smaller exemptions include gifts for marriage ceremonies (up to £1,000 from parents, £500 from grandparents and others) and gifts for normal expenditure out of income. The latter is particularly valuable for those with substantial income surplus – regular gifts funded from surplus income can be made entirely outside the inheritance tax scope. It is worth noting how more advisers and clients are looking to make gifts out of income for normal expenditure considering the upcoming pension changes from 2027, and this is an area which needs careful consideration, as HMRC’s guidance on this remains vague.

Chargeable gains on investment bonds

It is also worth keeping in mind that your client might want to realise any gains they have within an investment bond. Chargeable gains can be set against the starting rate for savings, the personal savings allowance and personal allowance which is a total of £18,500 in allowances before any tax needs to be paid on chargeable gains for an offshore bond. Although care is needed here as it is only segment surrenders where the chargeable gain arises at the point of the withdrawal. For using the 5% allowance (or exceeding it) this assessment is done on the last day of each policy year which of course could fall in the next tax year.

The wider picture

Effective year-end planning isn’t simply about maximising allowances in isolation. It requires a holistic view of each client’s circumstances: their income, inheritance tax exposure, family dynamics, and plans for the future.

The tax year-end is a natural milestone for a conversation with client. By acting now, clients can lock in positions before the year closes, whilst there’s still time to implement any recommendations.

All information is based on our understanding and interpretation of applicable law and regulation which is subject to change. Tax treatment depends on individual client circumstances and may change in the future.