How to make use of 10 annual tax allowances

As accountants, we know that the UK system is overly convoluted and overwhelmingly vast for the general public. Often, people will try to simplify it and see it as income comes in, tax goes out, and what’s left is the end of the matter. The truth, however, is that there’s a lot more than meets the eye and our aim is to help people understand some of the details to enable them to keep more of what they’ve earned. One of the simplest ways to do this is to make use of annual tax allowances and our team have put together the top 10 that you should make full use of wherever possible.

How does the UK tax year work?

First though, let’s quickly explain the “tax year” in the UK. Unlike other countries that follow the calendar year, the UK tax year runs from every 6th of April to the 5th of April of the following year. This means that you’ll often see a tax year be indicated by two years even though it’s still only covering a one-year period. So, for example, the 2025/26 tax year is the period which runs from 6th April 2025 until 5th April 2026.

This seemingly arbitrary date does have a reason though. It dates back to when the UK decided to switch from the Julian to Gregorian calendar in 1752. Doing this meant that 11 days were dropped from the original calendar and to prevent losing out on collecting a full year’s worth of tax revenue, the government adjusted the dates for a “tax year”. It’s remained this way ever since.

Why does this matter though? It’s important because many allowances will reset at the end of the tax year. Where you don’t make full use of them by midnight on 5th April then it essentially means you’ve lost out. Only certain tax allowances will allow you to carry it forwards and only for a limited period.

What is a tax allowance and why do we have them?

A tax allowance is the amount of money you can earn, or a type of gain you can make, without having to pay tax on it. Generally, tax allowances are offered to all UK taxpayers, but some may have qualifying conditions and others, such as the personal allowance, may be reduced for the wealthiest (those earning £100,000 or more annually will begin to lose their personal allowance). The government offer these allowances for a number of reasons:

• To promote fairness by ensuring those people on the lowest incomes and need as much of it as possible for their day-to-day lives don’t have to pay tax straight away. It aims to give everyone the same basic level of untaxed income.
• To offer simplicity for those who have small amounts of additional income. Certain allowances are designed to help taxpayers report their earnings responsibly without the burden of meticulously accounting for their expenditure. This helps streamline the tax return system and prevent mistakes whilst encouraging people to make use of their entrepreneurial spirit.
• To incentivise certain behaviours in order to achieve policy goals that the government may wish to promote such as boosting the number of people saving into a pension scheme for their futures, supporting those who want to start their own businesses, or promoting charitable giving.

How to claim tax allowances

Some tax allowances are automatically granted each year, whilst others need to be specifically claimed for, often through a self-assessment tax return. Some other types of tax allowances only become available once a triggering event has occurred. As we go through the list of each tax allowance below, we’ll be sure to explain the process for each one to ensure you don’t miss out.

Is a tax allowance the same as tax relief?

Whilst at first glance they do seem similar, tax allowances and tax reliefs are not the same thing. In fact, they work very differently, but the overall effect is that you’ll pay less tax. Tax allowances are certain amounts that are tax-free. On the other hand, tax reliefs are designed to help you reduce the amount of tax that may be due so utilising both is the best way to keep as much as possible from what you have earned.

Now, let’s get started with our top 10 tax allowances to make full use of wherever possible in each tax year:

1. The Personal Allowance

You probably already know about the personal allowance, but it’s the amount of money every taxpayer can earn tax-free each year before income tax becomes applicable to your earnings. For the 2025/26 tax year, this allowance is £12,570 which has been the case since 2022 and is due to be in place until at least 2028.

As we’ve touched on briefly above, although the personal allowance is automatically available to everyone, it does begin to get clawed back for those earning £100,000 or more a year. Once at this level of income, you’ll begin to lose £1 for every £2 over £100,000 and effectively means that if your total annual income is £125,140 or more then your entire personal allowance is removed.

Many people mistakenly believe that there’s not much they can do if they have unused or maxed out their personal allowance, but this is not necessarily true. Continue to read about the other annual tax allowances and learn how to combine tax planning strategies to save as much tax as possible.

2. The Marriage Allowance

The marriage allowance is just one tax benefit that is available to married couples or civil partners. It’s an excellent way to make sure you’re using up as much of your personal allowance as possible if you’re a low-income earner. Marriage allowance allows you to share your personal allowance with your spouse or partner so long as one of you is not fully utilising the personal allowance and the other is a basic rate income taxpayer.

When utilising marriage allowance, the lower earning spouse or partner is able to pass on up to £1,260 of their unused personal allowance to the other higher earning spouse or partner. Doing this equates to saving £252 per year as a couple.

To claim, you can apply online and even backdate your claim up to four years. Once you’ve claimed, you do not have to do anything else to claim for future years and must only inform HMRC if your personal circumstances change.

3. The Dividend Allowance

Dividends are discretionary payments made from a company to its shareholders when there has been a profitable year. It is a different type of income and whilst it follows the personal income tax bands, it is subject to its own specific tax rates. It also has a separate annual allowance to the personal allowance and for the tax year 20255/26 is £500 per year. The most common way people receive dividends is where they are a director and shareholder of their own limited company. You do not need to apply for the dividend allowance, but you do need to declare your dividends through a self-assessment tax return in order for the allowance to be utilised. You cannot backdate or carry forwards your dividend allowance so if you don’t make use of it one year, you have missed this tax saving. Some directors may choose to make their spouse or partner a shareholder in their company in order to utilise both individual’s dividend allowance.

4. The Capital Gains Tax Annual Exemption

Capital Gains Tax (CGT) only applies to you when you dispose of a qualifying asset and make a gain. So, although it is available every year, you may not be able to use it unless you’re in the position to be making multiple or regular disposals. If this is the case, then it’s strongly advised that you consider making these disposals across different tax years where possible to utilise the annual exemption. The annual exemption currently stands at £3,000 per person. You cannot backdate or carry forwards the CGT exemption. However, if you need to make multiple disposals in the same year, then where possible you can transfer assets to a spouse or partner for them to dispose of and utilise their annual exemption. There’s nothing you need to do in order to claim the exemption as it will automatically be applied once you report your capital gains through a self-assessment tax return or a 60-day CGT report if you have disposed of property.

5. The ISA allowance

ISAs (Individual Savings Accounts) are a simple way to save and invest tax-efficiently. There are different types of ISA accounts ranging from cash ISAs, stocks and shares ISAs, lifetime ISAs, and Innovative Finance ISAs. These products all offer the same tax benefit which is that any interest, dividends, or gains made within the ISA products are tax-free and do not impact your other allowances. There is a limit to how much you can invest in ISAs each year which currently stands at £20,000 but there is no maximum on how much they can make tax-free. This allowance cannot be carried forwards or backdated and it’s advisable that you invest as early as possible in a tax year to take advantage of compound interest. Be aware that with some ISAs such as the stocks and shares ISA in particular, your money is at risk, and your investment can go up as well as down so you could end up with less than you originally put in. There is no need to report your ISAs to HMRC and the allowance is automatically applied to your ISA accounts each year. However, if you accidentally oversubscribe (put in more than £20,000 in a tax year) then HMRC can instruct you to withdraw the excess. ISA providers are required to report subscriptions to HMRC.

6. The Savings Allowance

Interest from savings accounts held outside of ISA products have their own annual allowance. This is particularly helpful if you have already fully utilised your ISA allowance as it means you can still earn interest tax-free on your regular savings accounts. Unlike the ISA allowance, the limits are less generous and dependent upon your income tax band:

• Basic rate taxpayers can earn up to £1,000 tax-free per year
• Higher rate taxpayers can earn up £500 tax-free per year
• Additional rate taxpayers are unable to utilise the savings allowance 

You don’t need to apply for the savings allowance, and it is automatically given to you each year. Banks have the responsibility of reporting your interest to HMRC so HMRC may adjust your tax code accordingly if you receive PAYE income or pension income. If you are self-employed then you’ll have to report this on your self-assessment tax return and you’ll be able to find this detail on your bank statements. The allowance cannot be carried forwards or retrospectively claimed for so if you don’t make full use of it on year, you lose it.

7. The Pension Annual Allowance

The Pension Annual Allowance is another form of savings’ allowance. As the name suggests, it is distinctly different from the ISA and Savings allowances because it is specifically available only when savings are made into a pension scheme. Each year, you’re entitled to put in a maximum of £60,000 or 100% of your annual salary (whichever is lower). However, keep in mind that this limit not only applies to how much you have contributed, but also how much an employer may have contributed on your behalf also. Not only that, but if you’re a high earner with threshold income of £200,000 or more (threshold income includes all income streams but excludes pension contributions), and your adjusted income exceeds £260,000 (total income from all revenue streams including rental income, dividends and also pension contributions made by you or your employer) then your pension annual allowance begins to reduce under the tapered annual allowance. Once you have reached these limits, you’ll lose £1 from your pension annual allowance for every £2 that your adjusted income is over £260,000. The allowance can be reduced all the way to a minimum of £10,000 a year. Previously, there was a lifetime limit on how much you could put into your pension schemes, but this has since been abolished in 2024 so only the annual allowance remains. The pension annual allowance is fairly flexible and where you have not fully utilised the allowance from the previous three years, you’re able to carry it forwards so long as you already had a pension scheme open at the time.

8. The annual inheritance tax gift allowance

Inheritance tax is charged at 40% on your estate over £325,000, or £500,000 where you pass on your main residence to a child or grandchild and the residence nil-rate band applies. Gifts made during your lifetime can also be subject to inheritance tax where they are given within 7 years of your death, however, you can protect against this so long as you are within the annual inheritance gift allowance. Each year, you’re entitled to gift up to £3,000 in total to loved ones which will be exempt from inheritance tax. Be mindful that this is not £3,000 per person but a total annual allowance. This allowance can be carried forward if it is not fully used in one year, but only for one further year. If you have fully utilised the annual inheritance tax gift allowance, you may find you can still give gifts inheritance tax-free under certain circumstances such as for a wedding gift. This allowance does not have to be claimed through any tax return, but records should be kept to help those completing the inheritance tax return.

9. The trading allowance

More and more people are earning a little extra money on the side from their hobbies or side hustles without having to run a full blown business as a sole trader. The trading allowance is one way that helps make this easier. Each year, you can earn up to £1,000 tax-free and without having to submit a self-assessment tax return to claim this. If you earn over this amount, you can still claim the £1,000 trading allowance which means your earnings are reduced by this amount and you pay tax on anything over, but you do have to complete a self-assessment tax return. You can use the trading allowance together with the personal allowance to earn up to £13,570 tax-free a year but this allowance cannot be carried forwards. Be aware that if you choose to use the trading allowance, you’re not able to claim for your actual expenses so you’ll have to work out which option will leave you better off. Going forwards, HMRC has plans to extend the threshold up to £3,000. It means that whilst you’ll have to still pay tax on your earnings if you make more than £1,000 a year you won’t need to complete a full self-assessment tax return unless you earn over £3,000. This is planned to come into place by 2029.

10. The Property Income Allowance

The property income allowance works in the same way as the trading allowance; however, it is specifically related to income you may earn from renting out property you own. It’s not widely used by landlords but rather those that rent out smaller areas such as parking spaces or a garage that can be used for someone’s workshop. In the same way as the trading allowance, taxpayers are able to earn up to £1,000 tax-free by renting out these spaces. If the earnings are over, then you can choose to claim the property income allowance and submit a self-assessment tax return or forgo the property income allowance and claim for the actual expenditure instead if this is more. If the space is jointly owned, such as a couple owning a garage which they rent together, they can both claim the property income allowance on their share of the earnings. For example, if they rent out a garage for £3,000 a year, they each earn £1,500 from this and can both claim the property income allowance meaning they each have to pay tax on £500 at their own personal income tax rate. You cannot use the property income allowance if you are renting out a room in your own house, but instead can claim the Rent a Room relief which is far more generous.

Get help with claiming tax allowances

If our list has helped you identify tax allowances that you could be claiming for but are stuck on how to take advantage of them or need help filing a self-assessment tax return, then our team would be happy to help. Simply use our contact form to get in touch. If you enjoyed this article, why not consider subscribing to our monthly email newsletter?