Save More, Pay Less: 2025/26 Allowance Guide

October 18, 2025

What allowances do I have?

Personal Allowance (PA): £12,570 — Tax‑free allowance on any earnings or interest; this allowance reduces when you earn over £100,000.
Personal Savings Allowance (PSA): £1,000 if you’re a basic‑rate taxpayer; £500 if you’re higher‑rate — this is the amount of interest you can earn tax‑free.
Starting Rate for Savings: You can get up to £5,000 of interest taxed at 0% if your wages/pension/other non‑savings income, after using the £12,570 Personal Allowance, is under £5,000. This 0% band shrinks £1 for every £1 your other income exceeds the Personal Allowance and disappears once other income totals £17,570.
ISA allowance: £20,000 — interest, dividends and gains inside an ISA are tax‑free. (Flexible ISAs let you withdraw and replace within the tax year.)
Dividend allowance: £500 — above that, dividends taxed at 8.75% / 33.75% / 39.35% (basic / higher / additional). Dividends in ISAs are tax‑free.
Capital Gains Tax (CGT) annual exempt amount: £3,000 — gains above are taxed at 18%/24% for most assets.

Scope: Earnings tax bands differ in Scotland, but PSA, dividend rules, ISAs and CGT are UK‑wide.

Shelter first with ISAs. They future‑proof interest, dividends and gains.
Savings interest: Use Starting‑rate (if eligible) → then PSA → anything left is taxed.
Dividends: ISA if possible → then the £500 allowance → then dividend rates.
Capital gains: Use the £3,000 CGT allowance → offset losses → consider spouse transfers → then rates (18%/24%).

A) Dividends — basic‑rate taxpayer

Salary £35,000 + dividends £2,000 (all outside ISAs).
£500 covered by the dividend allowance; £1,500 taxed at 8.75% = £131.25. Hold these investments in an ISA next time so future dividends are tax‑free.

B) CGT — share sale (basic‑rate band)

Gain £10,000 on shares (outside ISA), no other gains.
Use £3,000 AEA ⇒ £7,000 taxable at 18% = £1,260. (Had this been in an ISA: £0.)

C) CGT — higher‑rate taxpayer

Gain £20,000 on a second asset.
After £3,000 AEA, £17,000 at 24% = £4,080. Consider staging disposals across tax years and/or spouse transfers.

Bed‑and‑ISA. Move taxable investments into ISAs over time to stop dividend/CGT leakage. How it works (HMRC): Share exchange ‘Bed and ISA’ guidance.
Marriage Allowance. If one partner doesn’t use all their PA and the other pays basic‑rate, you can transfer 10% of the PA to the basic‑rate partner (aka Marriage Allowance) — worth up to ~£251 off their tax bill in 2025/26.
Couples (ownership). Hold income‑producing assets with the lower‑rate partner to use PA/PSA/dividend allowance/CGT AEA efficiently. (Transfers between spouses/civil partners are CGT‑free.)
Take gains up to £3,000 each year (if you’ll use the cash or can re‑buy in an ISA) to reset future CGT.
Track interest & dividends. Banks/brokers pay most receipts gross; HMRC usually collects any tax due by adjusting your PAYE tax code or through Self Assessment.

Starting‑rate disappears once other income hits £17,570.
Dividend allowance is small (£500). Many first‑timers now owe a bit of tax — ISAs matter.
£100k+ income. Your Personal Allowance reduces £1 for every £2 over £100,000 (England/Wales/NI), creating a ~60% effective band between £100,000–£125,140 and squeezing starting‑rate room.
CGT rates changed. Since 30 Oct 2024, most assets are 18%/24%.

Max your £20k ISA each year.
For cash interest: apply 0% Starting Rate (if eligible) → PSA → any remainder is taxed.
Dividends: use ISAs first; then the £500 allowance; know your band rates.
CGT: use your £3,000 annual amount; harvest losses/gains; use spouse transfers where helpful.
Over the PSA? Consider low‑coupon UK gilts held directly: lower taxable interest; more of the return as CGT‑exempt price movement. Mind duration/price risk.
Keep records — HMRC usually adjusts via your code or Self Assessment.