Six simple ways to save tax in 2025

Key takeaways:

• The tax burden is the highest it’s been since the Second World War, making it essential to make the most of your tax-free allowances.
• With an ISA or and SIPP, you can shield your investments from capital gains and UK dividend taxes

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With tax year end just weeks away, there's still time to protect your wealth and reduce your tax bill.

The tax burden is at its highest level since the Second World War, with HMRC expected to collect nearly £1 trillion in 2024-25. That adds up to a staggering £17,200 for every adult in the UK!

Luckily for investors, there are still plenty of straightforward ways to trim your tax bill in 2025. Let's unpack six simple tax-saving strategies.

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1) Maximise pension tax relief

Pension investing might be a classic tax hack, but it’s still a complete game-changer. Pensions can help you build significant wealth by slashing your biggest tax bill: income tax.

Pension contributions benefit from a generous boost from HMRC with a 20% top-up for basic-rate taxpayers and a 40% top-up for higher-rate taxpayers. Known as pension tax relief, this boost means it only costs £800 to pay £1,000 into your pension if you're a basic-rate taxpayer and £600 to pay in £1,000 if you pay higher-rate tax. 

Here comes the magic. Because tax relief is added to your pension pot, it’s supercharged by long-term investment compounding. This means a higher rate taxpayer paying £300 each month into their pension could boost their wealth by £214,000 over 25 years, with an impressive £86,000 coming from tax relief alone (assuming 5% investment growth and a 2% annual increase in contributions). 

As tax year end approaches, harnessing the power of tax relief by maxing out your workplace or SIPP contributions is still one of the best ways to save tax and boost your long-term wealth.

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2) Claim back a tax rebate

If you’re a higher-rate taxpayer and you contribute to a pension, you could be owed a chunky tax rebate on your pension contributions. That’s because while higher-rate taxpayers are owed 40% tax relief, a lot of pensions only pay 20% automatically. 

The complex rules catch out many taxpayers, with experts estimating that as much as £1.3 billion is wasted every year on unclaimed pension tax relief.

The rules mean that personal pensions like SIPPs and some workplace schemes, known as “relief at source”, only add a 20% tax relief top-up. This leaves higher-rate taxpayers to claim back the additional 20% owed through their tax return. Higher-rate taxpayers paying £800 into a SIPP could be owed a tax rebate of £200 at the end of the tax year. 

If this applies to you, then you can claim a tax rebate through your tax return or by writing to HMRC with details of your pension contributions. 

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3) Watch out for the 62% tax trap

Thanks to a hidden tax trap, some high earners face sky-high tax bills of 62% on their income.

The tax trap kicks in because very high earners start to lose their tax-free personal allowance, with £1 lost for every £2 earned over £100,000. This costly combo of 40% income tax and a reduced personal allowance means someone earning £100,000, who gets a pay rise of £10,000, only takes home £3,800.

Again, pension savings are the ultimate secret weapon here, as you can claw back income tax paid. A high-earner could supercharge their pension by paying in an extra £10,000 with a cost of just £4,000 after tax. Over ten years, they could stash away £100,000 in pension savings with a total cost of just £40,000.

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4) Protect your investments from CGT and dividend tax

Investors need to watch out because Capital Gains Tax and dividend taxes are increasing. 

The OBR expects Capital Gains Tax (CGT) to soar to £23 billion by 2028 as tax changes drag more taxpayers into the net. Reduced allowances and increasing tax rates will make protecting your wealth inside an ISA or pension even more vital in years to come. 

Here's a summary of recent increases to CGT and dividend tax:

• In October 2024, the CGT rate increased from 10% to 18% for basic-rate taxpayers and 20% to 24% for higher-rate taxpayers for gains on shares.
• In April 2024, the CGT allowance was cut to just £3,000, down from £6,000 in tax year 2023-24 and £12,300 before April 2022. 
• In April 2024, the dividend tax allowance was cut to £500, down from £1,000 in tax year 2023-24 and £2,300 before April 2022. 

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These changes could land investors with much higher tax bills in the future. 

For example, an investor with dividend income of £2,000 and a gain on shares of £10,000 would now owe £506 dividend tax and £1,680 capital gains tax, assuming they pay higher-rate tax. In contrast, they would have had no tax to pay before April 2022.

Thankfully, you can still completely shield your wealth from capital gains and dividend tax by using an ISA or pension. 

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5) Make the most of annual allowances

Because ISAs and pensions are so valuable, it’s no surprise that HMRC sets a maximum investment limit each year. And understanding these rules will help you make the most of these annual limits.

Here’s a rundown of those annual allowances:

• Pension contributions are capped at £60,000 each tax year or your total income, whichever is lower. This £60,000 also includes employer contributions.
• You can carry forward unused allowances from the previous three tax years, although you can’t pay in more than your total income in the current tax year.
• If you start to withdraw taxable income from your pension, your allowance is reduced to £10,000 under the money purchase annual allowance rules.
• ISA contributions are capped at £20,000 each year, and you can’t carry forward any unused ISA allowance.

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If you can afford it, making the most of the tax-free allowances available is a no-brainer.

For example, if you receive a large windfall, you could use both your ISA and pension allowances to gradually shelter your wealth. You could protect investments of up to £80,000 each tax year.

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6) Save capital gains tax with a “Bed and ISA”

Despite its weird name, “Bed and ISA” has nothing to do with the Premier Inn! 

It’s a popular tax-saving strategy that works by selling some of your shares each tax year to use up your capital gains tax allowance and then rebuying them inside an ISA. You can gradually squirrel away investments inside a tax wrapper without triggering a capital gains tax bill.

Using a “Bed and ISA” strategy could be a great move if you’ve built up wealth outside an ISA and are sitting on a big potential tax charge. 

Over time, selling shares with a gain of £3,000 each year could help you shelter a big slice of your portfolio from both capital gains tax and dividend tax. You may need to pay trading charges, and there could be a small difference between the sale and purchase price due to timing. 

Acting now is crucial because capital gains tax allowance resets each year so you need to use or lose the current year's allowance.

Like other tax-saving strategies, making the most of the rules will help you build wealth and get that little bit closer to your retirement goals.

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Speaking of tax-savings strategies, right now with Freetrade, you can earn up to £2,000 worth of free shares when you contribute or transfer at least £5,000 to your Freetrade ISA or SIPP.

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Annual subscription required. Free share value depends on the amount you contribute per account. See the offer FAQs and terms for further details. 

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