Practical tax information to help you navigate through the tax system and plan tax efficiently by providing you with an overview of the key tax rules.
Throughout this guide you will find a number of tax tips and checklists to help you identify planning opportunities, pitfalls to avoid and areas where you may need to take action. We would be happy to help with advice on your specific position.
The rules, rates and allowances in this guide relate to the 2025/26 tax year and these may be different for other tax years.
Tax and your investments
Setting aside income is important for everyone, to provide for the unexpected or to build up a nest egg to enjoy in retirement. We cover some of the main methods below; residential property investment is dealt with in Property investment.
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Don’t forget to use the dividend and savings allowances. These allowances tax £500 of dividends and up to £1,000 of savings income at 0%. |
Pensions
Making pension contributions
Pensions are one of the most tax efficient forms of saving. Taxpayers benefit from tax relief on contributions at their marginal rate and investment income and capital gains will accrue within the scheme largely tax free.
An individual is entitled to tax relief on personal contributions in any given tax year up to the higher of 100% of earned income or £3,600 (gross). The mechanisms for giving tax relief depends on whether the individual is contributing to an occupational or personal pension scheme and are dealt with in A Few Essentials.
Employer pension contributions are an exempt benefit for the employee and a deduction from profits may be available to the employer.
There are controls which serve to limit the availability of tax relief on high levels of contribution. These are complex but, put simply, they may give rise to a tax charge if annual contributions exceed £60,000. This threshold is reduced for high income individuals; generally where a taxpayer has adjusted income in excess of £260,000 the maximum annual contribution possible will be restricted by £1 for every £2 for the excess income. The minimum annual allowance available after this restriction is £10,000.
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The annual allowance may be carried forward up to three tax years. We can assist you with planning your pension contributions to maximise the tax savings. |
Pensions freedom
Taxpayers have choice and flexibility when it comes to accessing their personal pension fund. Options include taking a tax free lump sum of 25% of the fund value and purchasing an annuity with the remaining fund or opting for a more flexible drawdown.
The total amount which can be withdrawn as a tax free lump sum (under whichever option chosen) is generally limited to a total of £268,275, except in certain circumstances where previous protections apply. Other income withdrawn from a fund is taxable as income.
The rules on pensions drawdown are complex and there are a number of options for taking a pension. Getting the right advice at the point of retirement is therefore crucial.
Money Purchase Annual Allowance
The government is aware of the possibility of people taking advantage of the flexibilities by ‘recycling’ their earned income into pensions and then immediately taking out amounts from their pension funds. The Money Purchase Annual Allowance sets the maximum amount of tax-efficient contributions an individual can make at £10,000 per annum in certain scenarios.
Tax free savings
Individual Savings Accounts
Individual Savings Accounts (ISAs) are free of income tax and CGT. There are maximum investment limits which apply for each tax year but, over several years, large investments can be built up. The overall annual ISA savings limit is £20,000. Investors can choose to invest in a cash ISA, stocks and shares ISA or an Innovative Finance ISA of a combination thereof as long as they do not exceed the investment limit.
Lifetime ISA
Adults aged between 18 and 40 may open a Lifetime ISA. Payments can be made into the account until you are 50. Individuals are able to contribute up to £4,000 per year and receive a 25% bonus from the government (up to £1,000 per year). Investments into a Lifetime ISA count towards the overall ISA savings limit of £20,000.
Lifetime ISA funds, including the government bonus, can be used to buy a first home worth up to £450,000 at any time from 12 months after the first subscription or can be withdrawn from age 60 completely tax-free.
Other tax efficient investments
The following investments work in varying ways. You should consider your needs in detail before entering into any commitments.
National Savings and Investment premium bonds
Premium bonds are tax free and you could win £1 million. However, the annual rate of return is not predictable.
Venture Capital Trusts
Venture Capital Trusts (VCTs) mainly invest in the shares of unquoted trading companies. Income tax relief of 30% is available on subscriptions for VCT shares, up to £200,000 investment per tax year, as long as the shares continue to be held for at least five years. An investor in the shares of a VCT will be exempt from tax on dividends and on any capital gain arising from disposal of the shares in the VCT (note limits apply where investments greater than £200,000 have been made in any one tax year).
Enterprise Investment Scheme
Under the Enterprise Investment Scheme (EIS), you are making an investment into the company itself. The EIS was developed to encourage investment in smaller, high-risk, unquoted companies.
Income tax relief at 30% is available on new equity investment (in qualifying unquoted trading companies) of up to £1 million. A higher limit of £2 million may apply to investments in ‘knowledge intensive companies’ (companies which invest in research and development or create intellectual property).
EIS investment also provides CGT benefits. There is exemption from CGT on sales of EIS shares held for at least three years. If the gain on the sale of another chargeable asset is reinvested in EIS shares, the gain on the disposal can be deferred.
Seed Enterprise Investment Scheme
The Seed Enterprise Investment Scheme (SEIS) was introduced to provide additional incentives for investments in startups and early-stage businesses. Income tax relief is higher than for VCT or EIS and is available at 50% in respect of qualifying SEIS shares up to an annual maximum investment (in all SEIS companies) of £200,000.
As for EIS, a CGT exemption is available where SEIS shares are sold more than three years after they are issued. Where an individual makes a capital gain and reinvests the gain in qualifying SEIS shares, up to 50% of the gain is exempt from CGT (subject to the annual investment maximum above). Note this is an exemption rather than a deferral.
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The income tax relief on an EIS or SEIS investment may be carried back to the previous tax year. This may be particularly useful where there is an insufficient tax liability in the current tax year for full relief to be given or can provide cashflow benefits. |
We can help
Contact us if you:
- Have surplus cash you would like to invest
- Have made an EIS or SEIS investment and want to maximise tax relief
- Are approaching retirement age
- Have income in excess of £100,000 and are subject to the reduction in the personal allowance
For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
