Five key allowances to use before the 5th of April 2025 tax year end

The UK tax year ends on 5 April 2025, so now’s the time to review your finances and take advantage of your annual allowances. By using your allowances effectively, you can reduce your tax bill, boost your savings, and set yourself up for a secure financial future. Here’s how you can make the most of them before the deadline.

1. Dividend allowance: Keep more of your earnings

The dividend allowance lets you earn up to £500 in dividends from investments without paying tax. If you’re a shareholder or receive dividend income, identify your dividend-producing investments and when they’re paid. Dividends can be paid monthly, quarterly, or annually.

Any dividend income over £500 will be taxed according to your income tax band:

• Basic-rate taxpayers: 8.75%
• Higher-rate taxpayers: 33.75
• Additional-rate taxpayers: 39.35%.

Why use your dividend allowance?

• Earn more tax-free: If your dividend income is under £500, you won’t pay tax on it.
• Reduce your taxable income: By using this annual allowance, you’ll lower your tax bill on dividend income.

Quick tips:

• Reinvest dividends: If you don’t need the income, consider reinvesting your dividends to grow your portfolio. Although this won’t help use your allowance, it’s a good way to maximise returns.
• Tax wrappers: Dividends from shares held in an ISA (Individual Savings Account) aren’t taxed. Consider using an ISA to benefit from tax-free dividend income (see below to learn more about ISAs).

2. ISA allowance: Save tax-free

An ISA is one of the best ways to save and invest in the UK without paying tax on any returns. Yet so many people fail to use up this allowance each tax year. You have a £20,000 ISA allowance (for adults) to use in the current tax year. This can be split between different types of ISAs, including:

• Cash ISAs. Read the Femme Finance guide on What is a Cash ISA and why should you have one?
• Stocks and shares ISAs
• Lifetime ISAs
• Innovative Finance ISAs.

Why use your ISA allowance?

Quite simply, once it’s gone, each year’s allowance is gone forever!

• Tax-free growth: Any interest, dividends, or capital gains you make through an ISA are tax-free year-after-year.
• Investment flexibility: Choose from a wide range of options, from cash, to stocks or even peer-to-peer lending.

Quick tips:

• Haven’t contributed yet? Make sure you use up your £20,000 allowance before 5 April.
• Already reached your ISA limit? Consider other savings and investment options for the short, medium and long-term, such as National Savings and Investments’ hugely popular Premium Bonds where prizes are tax-free.

3. Capital Gains Tax (CGT) allowance: Avoid tax on your profits

The CGT allowance lets you make up to £3,000 in tax-free capital gains from selling assets like property (excluding your main home), or valuable items.

Why use your CGT allowance?

• No tax on capital gains: If you make less than £3,000 in gains, you won’t pay tax on them.

Quick tips:

• Make additional sales: If you’ve realised capital gains this year, consider making additional sales before 5 April to fully use the £3,000 CGT allowance.
• Tax reduction strategy: You can reduce your taxable gains by deducting any losses incurred or claiming certain reliefs. Visit Unbiased to find and speak to a financial adviser for more details.

4. Pension contributions: Save for your future and lower your taxable income

Contributing to a pension not only helps you save for retirement, but it also reduces your taxable income. In the UK, you can contribute up to £60,000 to your pension and receive tax relief.

Why use your pension allowance?

• Tax relief on contributions: For every £80 you contribute, the Government adds £20 if you’re a basic-rate taxpayer, or £40 for higher-rate taxpayers.
• Tax-free growth: Your pension funds grow tax-free, helping you build a larger retirement pot.
• Lower your taxable income: By contributing more to your pension, you reduce your taxable income and lower your overall tax liability.

Quick tips:

• Maximise contributions: If your earnings are high, consider contributing to your pension before 5 April to reduce your taxable income.
• Check Your Limits: Make sure you haven’t already reached the £60,000 contribution limit, and if not, consider additional contributions to benefit from tax relief.

5. Inheritance Tax (IHT) annual £3,000 gift exemption: Reduce IHT

The Inheritance Tax (IHT) annual gift exemption allows you to gift up to £3,000 (in total) without it being counted towards your estate for IHT purposes. This is a great way to reduce future inheritance tax and pass on wealth to loved ones now.

Why use your IHT allowance?

• Legally reduce your estate’s value: While £3,000 may not seem like much today, over time, it adds up and can lower the value of your estate, reducing the IHT owed once you pass.
• Help family and friends: You can gift this money to anyone, making it a valuable way to support loved ones financially.

Quick tips:

• Haven’t used it yet? Consider gifting it to family or friends before the 5 April deadline.
• Remember, any gifts under this exemption limit won’t count towards your estate when calculating IHT.

Why it’s so important to use these allowances before the tax year ends

Each of these key allowances has a deadline of 5 April. Missing the deadline means you lose the opportunity to use them for the current tax year. Pensions have special ‘carry forward’ rules which can be complex. If you’re unsure, speak to a financial adviser for more details. We recommend heading to Unbiased to find a suitable professional.

Key benefits of using your UK Tax Year annual allowances before 5 April:

• Tax efficiency: By using these allowances, you keep more of your income and savings, reducing your overall tax liability.
• Better financial planning: These allowances can help you plan more effectively for your financial future.
• Peace of mind: Using these allowances ensures you’re making the most of the available opportunities before the end of the UK tax year.

UK Tax Year annual allowances are the way to reduce your tax bill and maximise your savings. Check back on Femme Finance where we’ll be posting regular blogs to help you navigate your personal finances.