Posted December 16, 2025

ISAs and Pensions: Maximising Your 2025/26 Allowances

Every tax year brings a fresh opportunity to make the most of your tax-free savings and investment allowances. Yet millions of people leave valuable tax relief on the table simply because they’re unsure how to use their allowances effectively or leave planning until it’s too late.

ISAs and pensions remain two of the most powerful tools for building wealth in a tax-efficient manner. Used strategically, they can save you thousands of pounds in tax over your lifetime while helping you achieve your financial goals, whether that’s buying a home, securing a comfortable retirement, or simply growing your wealth.

With the 2025/26 tax year underway, now is the perfect time to review your strategy and ensure you’re making the most of every allowance available to you.

Understanding Your ISA Allowances

Individual Savings Accounts (ISAs) allow you to save and invest without paying tax on interest, dividends, or capital gains. It’s one of the simplest and most accessible tax shelters available to UK residents.

The £20,000 Annual ISA Allowance

For the 2025/26 tax year, an individual over the age of 18 can contribute up to £20,000 across all your ISAs combined. This allowance resets each tax year on 6th April, and any unused allowance cannot be carried forward-it’s a case of use it or lose it.

You can split your £20,000 allowance across different types of ISAs, including cash ISAs for savings, stocks and shares ISAs for investments, innovative finance ISAs for peer-to-peer lending, and lifetime ISAs (with specific rules we’ll explore shortly).

The key restriction is that you can only pay into one ISA of each type per tax year, though you can transfer between providers without using up your current year’s allowance.

The £20,000 cash ISA allowance is reducing to £12,000 for individuals under 65 from April 2027.

Cash ISAs: Tax-Free Interest

Cash ISAs work like ordinary savings accounts but without any tax on the interest you earn.

Even though the Personal Savings Allowance means basic rate taxpayers can earn £1,000 in interest tax-free (£500 for higher rate taxpayers), cash ISAs become increasingly valuable as your savings grow. Additional rate taxpayers have no personal savings allowance, making ISAs even more crucial.

Stocks and Shares ISAs

All dividends and capital gains within the ISA wrapper are completely tax-free, which can make a substantial difference over time.

Outside an ISA, you’d potentially face Capital Gains Tax and dividend tax on significant portions of your growth.

Pension Allowances

While ISAs offer tax-free growth, pensions provide upfront tax relief on contributions, making them a tax-efficient efficient vehicle for retirement saving-particularly for higher earners.

The Annual Allowance

The pension annual allowance for 2025/26 is £60,000. This is the maximum you can contribute to your pension pots in a single tax year while still receiving tax relief. Contributions above this limit face a tax charge that effectively claws back the excess relief.

Crucially, this allowance includes both your personal contributions and any employer contributions. For most people, staying within the allowance isn’t difficult, but high earners or those receiving large bonuses should pay careful attention.

Carry Forward Rules

One of the most valuable features of pension allowances is the ability to carry forward unused allowances from the previous three tax years. This allows you to make significantly larger contributions in one year if you have the means, provided you were a member of a registered pension scheme in those earlier years.

For example, if you didn’t use any of your pension allowance in the previous three years, you could potentially contribute up to £240,000 in 2025/26 (current year £60,000 plus three prior years at £60,000 each), receiving full tax relief if your earnings support it.

How Pension Tax Relief Works

Pension contributions receive tax relief at your marginal rate. If you’re a basic rate taxpayer paying 20% tax, a £100 contribution to your pension only costs you £80 from your net income, as the pension provider claims £20 from HMRC.  Higher rate and additional rate taxpayers can claim 40% and 45% tax relief respectively.

This makes pensions one of the most tax-efficient investments available, particularly for higher earners. Not only do you get substantial upfront relief, but your pension grows largely tax-free, and you can take 25% tax-free when you retire.

Tax relief can only be claimed on relevant pensionable earnings, these are employment, self-employment and royalty income.  So if your employment income is £20,000 and you receive £100,000 inheritance, you cannot put the £100,000 into a pension and claim tax relief as your relevant earnings are only £20,000.

The Tapered Annual Allowance

High earners face a reduced annual allowance through the tapered annual allowance. If your threshold income exceeds £200,000 and your adjusted income exceeds £260,000, your annual allowance reduces by £1 for every £2 of adjusted income over £260,000, down to a minimum of £10,000.

This particularly affects senior professionals, business owners with fluctuating income, and those receiving large bonuses. If you’re in this bracket, careful planning is essential to avoid unexpected tax charges.

The Money Purchase Annual Allowance Trap

If you’ve already started drawing income from a defined contribution pension (beyond your tax-free lump sum), you’ll be subject to the Money Purchase Annual Allowance (MPAA) of just £10,000 per year. This severely restricts your ability to make further pension contributions while receiving tax relief.

The MPAA catches many people by surprise, particularly those who retire early then return to work. Once triggered, it’s permanent, so think carefully before accessing your pension.

End of Tax Year Planning

As 5th April approaches, review your position. Have you used your ISA allowance? Have you maximized pension contributions given your income? Are there opportunities to use your spouse’s allowances?

Many providers experience high demand in March, so don’t leave contributions until the final days. Transfers can take time, and you don’t want to miss out on allowances because of administrative delays.

Common Mistakes to Avoid

Even with good intentions, several pitfalls catch people out.

Missing the Deadline

The 5th April deadline is absolute. Unlike Self Assessment tax returns, there’s no extension. If you miss it, that year’s allowance is lost forever.

Exceeding Allowances

Contributing more than £20,000 to ISAs in a year results in excess contributions being taxed as if they were never in an ISA. HMRC can be surprisingly harsh about this, so track your contributions carefully, especially if using multiple providers.

Paying Into Multiple ISAs of the Same Type

You can only pay into one cash ISA, one stocks and shares ISA, one innovative finance ISA, and one Lifetime ISA per tax year. You can hold multiple ISAs from previous years, but new contributions must follow this rule.

Forgetting About Transfers

You can transfer ISA pots between providers without using your current year’s allowance, but you must do it properly. Withdrawing money and depositing it elsewhere uses up your allowance and loses the tax-free protection on the withdrawn amount. Always use the official ISA transfer process.

Overlooking Employer Pension Contributions

Some people focus only on their personal pension contributions and forget that employer contributions count toward the annual allowance. If your employer is particularly generous, you could breach the allowance without realizing it.