An introduction to tax planning

Whilst we’d all probably agree that paying tax that goes towards providing the important services we all rely on, such as the NHS and schools, is the right and proper thing to do, no one needs to end up paying more than their fair share.

Each year, the government announces the tax allowances and exemptions that we are entitled to and it makes sense to maximise their use in meeting our individual financial goals.

Most of us face being taxed on our income, our capital gains and in some circumstances, the value of our estate when we die. Taxation can be complicated, and the rules, reliefs, exemptions and allowances often change, so it is worth seeking advice to be clear on how taxes work and the most efficient way to arrange your finances.

In our experience, many people can easily find themselves paying too much tax. That’s why it’s important that your financial position is regularly reviewed to ensure that you don’t miss out on opportunities that could reduce your tax liability.

In the UK, the tax year runs from 6 April through to 5 April. Each of us has a ‘Personal Allowance’. This is the amount we can earn without paying any Income Tax. For the 2025-26 tax year this is £12,570.

If you earn more than your Personal Allowance, you pay tax at the applicable rate on all earnings above the allowance, but the allowance itself remains untaxed. Those who earn over £100,000 will find that their Personal Allowance reduces by £1 for every £2 of adjusted net income above the £100,000 limit.

For the 2025-26 tax year, if you live in England, Wales or Northern Ireland, there are three Income Tax bands – the 20% basic rate, the 40% higher rate and the 45% additional rate.

If you live in Scotland, there are six Income Tax bands – the starter rate of 19%, the 20% basic rate, the 21% intermediate rate, the 42% higher rate, the advanced rate of 45% and the 48% top rate.

ISAs represent a tax-efficient way of saving or investing and the annual allowance for 2025-26 is £20,000. Saving for children is encouraged too, through a Junior ISA (annual allowance £9,000).

There are several different types, including the Lifetime ISA which is designed for those aged 18 to 40, wanting to save for their first home or their retirement.

You can contribute up to £4,000 in each tax year as part of your £20,000 overall limit. Contributions and government bonuses can continue up to age 50.

We can help you maximise your annual £20,000 allowance and recommend the right plans, taking into consideration your financial goals.

The government confirmed in the Spring Statement 2025 that it is considering reforms to ISAs to boost savers’ returns and the government’s growth goals, for example by nudging more savers from Cash ISAs to Stocks and Shares ISAs.

ISA allowances can be used to make investments as well as savings. We will always consider your tax position when deciding where you should put any money that you want to invest for the future.

We can explain how Capital Gains Tax (CGT) works, and how best to use your annual personal exemption (£3,000 in the 2025-26 tax year). We will also take into consideration the tax-free dividend allowance (£500 in the 2025-26 tax year) and be able to explain how dividend income over that level is taxed.

For those with substantial funds to invest who are prepared to accept a higher level of risk, then Enterprise Investment Schemes, Venture Capital Trusts and Seed Enterprise Investment Schemes all come with Income Tax and Capital Gains Tax benefits.

One of the key attractions of paying into a pension is the tax relief available to savers. Basic rate taxpayers receive 20% tax relief on their contributions. Higher rate taxpayers can get up to 40% relief and the figure for additional rate taxpayers is 45%, which in both instances can be claimed through their tax returns.

Scottish taxpayers paying tax at 21%, 42%, 45% or 48% will also need to claim their tax relief through their annual tax returns.

Generally, the annual allowance for pensions is £60,000, however, if you start to take money from a defined contribution pension, the amount you can pay in without penalty may reduce. This is known as the Money Purchase Annual Allowance or MPAA for short. The MPAA will not be invoked if you just take your pension commencement lump sum (PCLS), among other exemptions. The MPAA for 2025-26 is £10,000.

Pensions can be complex, that’s why many people seek help. We can help ensure not only that you maximise the use of your allowable contribution limits, but also ensure that when the time comes to take your pension, you do so in as tax-efficient a way as possible. The good news is that you can take 25% of your pension pot from age 55 (rising to age 57 in 2028) in the form of a tax-free lump sum.

Many people are concerned that on their death, their families will be faced with a sizeable bill for Inheritance Tax (IHT). Where the tax is payable, the rate applicable is 40%, although this can be reduced to 36% if you leave at least 10% of your net estate to charity.

However, with careful planning it’s possible to reduce the level of tax payable. The nil rate band is £325,000 per person and where a main residence is passed to a direct descendant there is an allowance of £175,000 in this tax year.

We can explain how you can use your annual IHT allowances to make small gifts each year. If you wish to give away more substantial sums during your lifetime, we will be able to explain how you can do this tax-efficiently. If you survive for seven years after making the gift, it will be outside of your estate for IHT.

The Lifetime Allowance (LTA) on pensions, previously £1,073,100 for the 2023/24 tax year, was removed completely from 6 April 2024. Since the abolition of the LTA charge the previous April, pension benefits are now subject to Income Tax at the individual’s marginal rate.

With the abolition of the LTA came the introduction of two new allowances which limit tax-free lump sums paid from registered pension schemes – the lump sum allowance (LSA) and the lump sum and death benefit allowance (LSDBA):

LSA – a fixed cumulative limit of £268,275 (25% of the 2023/24 LTA) on the tax-free cash that can be paid as pension commencement lump sums (PCLS) and on the tax-free part of uncrystallised funds pension lump sums (UFPLS)

LSDBA – a fixed cumulative limit of £1,073,100 (the 2023/24 LTA) on the total amount of the tax-free part of lump sums and lump sum death benefits payable to and in respect of a member. In addition to the PCLS and tax-free elements of UFPLS, tax free elements of serious ill health lump sums and lump sum death benefits use up this allowance.

For both allowances, those with old-style Lifetime Allowance protections will have higher allowances (noting that the window for new applications for Individual Protection 2016 and Fixed Protection 2016 will close from 5 April 2025).

Tax planning involves taking sensible steps to reduce the amount of tax you pay. However, whilst tax-efficiency can have a vital part to play in successful saving and investment, it’s important not to let it be the sole driver of your savings or investment decisions, or to steer you away from achieving your core financial goals.

Working with us can help you put in place the right plans for your future to safeguard your wealth.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.

We’re only a phone call away, so if you have any questions or would like to discuss the best options for your individual circumstances, please do get in touch.

Some Important Tax Rates for 2025-26

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding of taxation and HMRC rules and can be subject to change in future. It does not provide individual tailored

investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details.

We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission.

You will incur a lifetime ISA government withdrawal charge (currently 25%) if you transfer the funds to a different ISA or withdraw the funds before age 60 and you may therefore get back less than you paid into a lifetime ISA.
By saving in a lifetime ISA instead of enrolling in, or contributing to an auto-enrolment pension scheme, occupational pension scheme, or personal pension scheme:
(i) you may lose the benefit of contributions from your employer (if any) to that scheme; and
(ii) your current and future entitlement to means tested benefits (if any) may be affected.
please expand FCA to Financial Conduct Authority

Venture Capital Trusts (VCT/Enterprise Investment Schemes (EIS) invest in assets that are high risk and can be difficult to sell such as shares in unlisted companies. The value of the investment and the income from it can fall as well as rise and investors may not get back what they originally invested, even taking into account the tax benefits.