Making the most of your tax allowances is the best way to ensure the fruits of your investing stay in your pocket.
As we come to the end of the 2025/26 tax year, you might be wondering how to use your remaining allowances most efficiently. Or, you might want to plan for 2026/27.
Tax-efficient allowances
Generally speaking, utilising these allowances should be the cornerstone of your long-term investment strategy.
That’s because ISAs, like Freetrade’s Stocks and Shares ISA, and pensions, like Freetrade’s Self-Invested Personal Pension (SIPP), are tax-efficient accounts. This means the money and investments held within them are sheltered from income tax and capital gains tax.
In short, you get to keep more.
However, the amount you can contribute each year to these accounts is capped. These caps might influence where you choose to put your money, and when you choose to make contributions.
Pension annual allowance
This is how much that can be contributed to your pension each tax year while still receiving tax relief. For most people, it is capped at £60,000.
The amount you can pay is reduced to £10,000 per tax year if you flexibly access your defined contribution pension pot.
A particularly high income will also reduce your annual allowance. This is called a tapered annual allowance, and will affect you if both:
- Your income excluding any amount you pay into a pension exceeds £200,000.
- Your total income and employer pension contributions exceed £260,000.
Your allowance will drop by £1 for every £2 over £260,000 mark the second figure climbs.
Pension allowance tip: You can carry forward unused pension annual allowances from the past three years. This means you can contribute more than £60,000 in a single tax year and still receive tax relief. However, your contributions cannot exceed your income for that tax year.
ISA allowance
Each tax year, you can pay a total of £20,000 into your ISA accounts.
Unused ISA allowances can not be carried forward. When a tax year ends, that year’s allowance is gone.
Before the end of a tax year, it can be worth ensuring you have utilised this allowance to the greatest extent possible.
ISA allowance tip: Flexible ISAs allow you to withdraw money from an account and replace it in the same year, without this affecting your annual allowance. Freetrade’s Stocks and Shares ISA is flexible.
Other allowances
Your cash and investments held outside tax-efficient wrappers are subject to certain taxes. However, there are annual allowances which can still help you to keep more of your money.
- Capital gains tax: You have an annual allowance of £3,000 for capital gains in 2025/26. Capital gains are profits from the sale of an asset which has increased in value.
- Dividend allowance: For 2025/26, the dividend allowance is £500 (beyond your personal allowance).
- Personal savings allowance: If you are a basic rate taxpayer, you can earn up to £1,000 of interest each year without paying any tax on it. This includes any returns made on Treasury bills. However, the allowance dips to £500 for higher rate taxpayers and is £0 for those on the additional rate.
You might be able to take advantage of these allowances to ensure you are fully utilising the money and investments you hold outside of tax-efficient accounts, such as in a General Investment Account (GIA).
More tax-efficient tips
Aside from allowances and your tax-efficient wrappers, there are other ways you can play smart with your money:
- Salary sacrifice schemes: Some workplaces offer salary sacrifice schemes, which allow you to use your gross salary to contribute to your pension or to pay for non-cash benefits like childcare or an electric vehicle.
- Junior ISAs: If you have children, opening and funding a Junior ISA allows you to build a pot of tax-efficient savings for them to access when they turn 18.
Your allowances - FAQs
Does the £60,000 pension allowance include employer contributions?
Yes, your annual allowance applies to pension contributions made by you AND your employer.
What is the maximum I can pay into my pension each year?
Most people can pay £60,000 into their pension each tax year. Your annual allowance will be lower if you have triggered the money purchase annual allowance by accessing your pension pot, or if you have a high income.
When did the annual allowance change to 60k?
The annual allowance increased from £40,000 to £60,000 in the 2023/24 tax year.
What happens if I exceed my pension annual allowance?
If you exceed the annual allowance, the excess is subject to the pensions annual allowance tax charge. This is essentially equivalent to your marginal rate of income tax.
If you exceed the allowance, you may be informed by your pension scheme. You must, in turn, report this to HMRC as part of your Self Assessment tax return.
What triggers the money purchase annual allowance?
The money purchase annual allowance is triggered by flexibly accessing your pension pot, such as by taking an Uncrystallised Funds Pension Lump Sum (UFPLS).
Can you put £20,000 in the same ISA every year?
Yes, you can keep contributing to the same ISA over many tax years. Just make sure not to exceed the annual allowance of £20,000 each tax year.
What are the new rules on cash ISAs?
From the 2027/28 tax year onwards, yearly contributions to Cash ISAs will be capped at £12,000. However, the current £20,000 limit will continue to apply to Stocks and Shares ISAs. Further rules may change, so be sure to watch out for any updates before April 2027.
Do I need to declare an ISA on my tax return?
No, you do not need to declare your ISA on a tax return.
Capital at risk. The value of your investments can go down as well as up and you may get back less than you invest.
SIPP and ISA rules apply. Tax treatment depends on your personal circumstances and current rules may change.
A SIPP is a pension designed for people who want to make their own investment decisions. You can normally only access your money from age 55 (57 from 2028).
Freetrade currently only supports Uncrystallised Funds Pension Lump Sums (UFPLS) for SIPP withdrawals.
Seek professional advice if you need help with your pension.
