Budget Countdown: make the most of tax allowances

There are just a little over two weeks to go until the first Budget under the new Labour government on 30 October – the day before Halloween.

While there’s plenty of hope it won’t contain anything too scary, there has been much speculation about the tax measures Chancellor Rachel Reeves will announce in a bid to raise more money to “plug a £21.9 billion black hole in the public finances”.¹

The government has ruled out raising income tax, national insurance contributions or VAT. That leaves taxes on investment gains and pensions among others, as potential targets.

Know your tax allowances

While tax shouldn’t be the primary motivator for investment decision-making, it’s certainly an important consideration. Not making use of available tax allowances could have a significant impact on your overall wealth over the longer-term.

Speculation shouldn’t drive your decision, but it’s good practice to review your current allowances throughout the tax year. So now is a good a time as any.

Lee Platt, a Wealth Planner at Barclays, said “There are many different possible changes that have been mooted, but until the announcement on 30 October, these are all theoretical scenarios – and knee-jerk reactions should be avoided. Even if changes are announced, they are unlikely to take effect straight away, so there will be time after the Budget to make an informed decision as to the best course of action.

“For those who do want to stay on the front foot and take action now, it’s worth positioning yourself to ensure you maximise all available tax allowances, such as ISAs and pension contributions before the current tax year ends on 5 April 2025.”

Maximising your tax-free allowances before any changes

Here are some of the key ones to consider as part of your personal pre-Budget review:

ISAs

Using an Individual Savings Account (ISA) you can save and invest money in a tax-efficient way. There’s no income tax, tax on dividends or capital gains tax (CGT) to pay on any gains from investments held in any kind of ISA.

And this year it’s looking increasingly popular. Twice as many Smart Investor customers have already put their full £20,000 allowance into their Investment (Stocks & Shares) ISA so far this tax year compared to this time last year.

And analysis from Barclays revealed 13 million UK adults are holding £430 billion of “possible investments” in cash deposits.² This money could be working harder in an Investment ISA.

There are several different ways you can choose to use any remaining ISA allowance you may have.

You can use some or all in a cash ISA, Investment (Stocks & Shares) ISA, Innovative Finance ISA³ and one Lifetime ISA for those aged between 18-39.³ If you have children you can use a Junior ISA³ to put money aside for their future and shelter £9,000 per child per tax year.

TAX ACTION: ISAs offer a simple way to protect your returns from tax meaning you keep all of your gains and any dividends. You don’t even have to mention your ISA on your tax return. If you don’t use your annual ISA allowance – you lose it.

Pensions

If you’re a basic rate taxpayer, for every £80 you pay into a private pension HM Revenue & Customs will top it up to £100. And if you're a higher or additional rate taxpayer, you can currently claim back up to another 20% or 25% through your annual UK self-assessment tax return.

However, you may not need to claim additional tax relief if you make contributions via salary sacrifice or net pay arrangements through your employer.

You can usually contribute up to £60,000 per tax year in a pension, and if you haven’t maximised this allowance in previous years you can carry forward any unused pension allowance from the previous three tax years – provided you were a member of a registered UK pension scheme during those years.

TAX ACTION: If you can afford to top up your pension and are comfortable you won’t need to access the money until retirement, now a good time to consider doing so.

Capital Gains Tax

Unless you’ve invested within an ISA, when you sell an investment such as shares, you’ll pay Capital Gains Tax (CGT) on any increase in value that exceeds your annual CGT allowance. For the 2024-25 tax year, the CGT allowance is £3,000. Couples have a combined £6,000 allowance. On the sale of shares with a gain above the annual allowance generally, basic rate taxpayers pay CGT at a rate of 10% and for higher and additional rate taxpayers it’s 20% (rates differ for property).

There’s speculation that we could see changes to CGT in the Budget and that the tax rates might increase. It’s unlikely that any change would take effect during the current tax year, but if you’re thinking of selling some investments in the near future, you might want to consider the timing to try and minimise the amount of tax you pay.

Everyone, including children, has a £3,000 CGT annual allowance so it may also be worth considering transferring assets to a partner, spouse or child before realising gains.

Going forward, if we do see CGT go up, there’s an even stronger reason to make use of your annual ISA and pension allowances, to invest as tax efficiently as possible.

TAX ACTION: Consider the timing of selling shares if you plan to raise cash in the near future and bear in mind potential changes to CGT.

Dividends

All taxpayers have an annual tax-free dividend allowance of £500, so only dividend income above this allowance is taxed. Dividends above the £500 threshold are subject to tax at 8.75% for basic-rate taxpayers, rising to 33.75% and 39.35% respectively for higher-rate and additional-rate taxpayers.

TAX ACTION: Any dividends received in an Investment ISA are free from additional tax. If you typically receive dividends over the annual allowance from shares held outside tax-efficient accounts, and you have any unused ISA allowance for this tax year, you can explore a ‘Bed and ISA’ to ensure future dividends tax-free. This is where you sell shares and buy them straight back within an ISA.