Tax changes and a freezing of many allowances from April 2025 are likely to place pressure on our finances next year, but there are steps you may be able to take to reduce the burden.
High living costs are already making it difficult for many of us to make ends meet, with the price of food, energy and other essential costs all remaining high.
Here we take a look at some of the tax changes that are due to come into effect in the 2025/26 tax year – and what you might be able to do to minimise the impact of these on your finances.
1. Dividend allowance frozen
The tax-free dividend allowance fell from £2,000 to £1,000 in the 2023/24 tax year, and reduced again to £500 from April 2024. It will remain frozen at this level in 2025/26. If you receive more than your tax-free allowance in dividends in the tax year outside an ISA, you’ll pay tax on this income. The current dividend tax rates are 8.75% for basic rate taxpayers, and 33.75% for higher rate taxpayers. Learn more in our article How are dividends taxed?
What can you do about it?
Any dividends you receive on investments held within an ISA are tax-free, so if possible, it’s worth making use of your stocks and shares ISA allowance.
The ISA allowance for the current 2024/25 tax year stands at £20,000, and you get a new allowance at the start of each new tax year from April 6, so from April 2025, you’ll be able to put another £20,000 into ISAs. It’s a case of use it or lose it with your ISA allowance, as you cannot carry it over into the following tax year. Read more about ISAs in our article Everything you need to know about ISAs.
Dividends received within a pension are also free from tax, and any pension contributions benefit from tax relief at your marginal rate, too. However, pension withdrawals above the 25% tax-free cash lump sum are taxed as income. Learn more in our guide How much tax will I pay on pension withdrawals?
This tax year you can pay up to £60,000 into your pension and benefit from tax relief. You are also able to carry forward unused annual allowances from up to three previous tax years, under carry forward rules. Find out how these rules work in our article Pension carry forward explained.
Depending on your personal situation and employment status, using the carry forward rule can be complicated and you may need the help of a tax and/or a professional financial advisor. If you want help from an accountant, you can find a qualified chartered accountant in your local area using the Institute of Chartered Accountants in England and Wales’ (ICAEW) directory of chartered accountants.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
2. Income tax thresholds unchanged
Most people will end up paying more tax next year, due to the freezing of income tax allowances and so-called ‘fiscal drag’. This is the process by which people end up paying more tax when tax rates and thresholds don’t change, as they earn more and their assets rise in value. The current tax thresholds are £12,570 (basic rate), £50,270 (higher rate), and £125,140 (additional rate).
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “Income tax and National Insurance thresholds will be frozen until 2028, and between now and then every pay rise will mean you pay more tax and creep ever closer to crossing a tax threshold. It means some people will be pushed over the personal allowance and be forced to pay income tax and National Insurance for the first time, while others find themselves facing higher or additional rate tax.”
What can you do about it?
If you’re looking to reduce the amount you pay in income tax, it’s worth checking you’re on the right tax code, as you can get a refund of income tax payments if you’ve paid too much. Sometimes new employees are put on emergency tax codes when they change jobs, meaning they’ll be charged at a higher rate. You can use the government’s online tool to work out how much income tax you should be paying. You may be due a refund, you can apply for this here.
If you’re married, you may be able to use the Marriage Allowance to reduce the overall amount of tax you pay, by transferring up to 10% of your personal allowance to your partner. The personal allowance is £12,570 in the 2025/26 tax year, which means you can transfer £1,257. This gives your partner an increased personal allowance, and reduces their tax bill. You can also backdate your claim to any tax year since April, 2017. Find out more about this allowance and whether you might be eligible in our article Marriage Allowance explained.
3. Higher council tax bills
Most councils are likely to increase council tax bills by 5% this next April, with some hiking costs by much more than this. Someone in England in Council Tax band D, for example, is currently paying council tax bills of £2,171 this tax year, and this is likely to increase by around another £100 in April 2025.
You can find out how much your council tax is increasing by finding your local council, if you don’t already know what this is, using the gov.uk tool, and look at its website. Check your latest bill to find out which council tax band your home falls under – these range from A to H.
What can you do about it?
You’re sent a council tax bill every April which details how much you’ll pay, and usually payments are spread over a period of 10 months. However, you can choose to pay over 12 months to reduce your monthly payments.
You may be able to claim a reduction in your council tax bill ranging from 25% to 100% if you live alone, you’re claiming certain benefits, on a low income, or have caring responsibilities. You can find out more from your local authority and apply to them directly for a council tax reduction. See if you’re eligible and find out more about how to apply at Gov.uk.
Find out more about ways you might be able to reduce your council tax in our guide 6 ways you might be able to save money on your Council Tax.
4. Inheritance Tax threshold frozen
The current Inheritance Tax threshold, called the ‘nil-rate band’, will remain frozen yet again at £325,000 in the 2025/26 tax year. It has stood at this level since April 2009, and any assets over and above this amount are usually subject to tax at 40%. There’s also a main residence allowance. This allowance applies in addition to the existing nil rate band, but only where the person who has died is transferring a property that was once their home, to their direct descendants (i.e. children or grandchildren). The residence nil-rate band is currently £175,000, having increased to this limit in April 2020.
These thresholds will continue to be frozen at this level until at least 2030, the Chanceller Rachel Reeves announced in the October 2024 Budget, seeing more people paying this tax on death, as property prices rise. Find out more in our guide Understanding Inheritance Tax.
What can you do about it?
You can take some simple steps to reduce the amount of Inheritance Tax you pay. For example, you can give away up to £3,000 each tax year without this money being subject to your estate for Inheritance Tax purposes. If you’re married or in a civil partnership, you can make as many gifts to your spouse or partner as you want during your lifetime, free from IHT. Read more in our articles Which gifts are exempt from Inheritance Tax?
Other ways you might be able to reduce your liability to Inheritance Tax include taking out a life insurance policy that’s written in trust. Read more in our article Six ways to reduce Inheritance Tax bills. Bear in mind, though, that some of these options may not be suitable for you, so you should seek professional financial advice if you’re looking for specific recommendations based on your personal circumstances. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guide How to find the right financial advisor for you.
5. Higher Capital Gains Tax (CGT) bills
The annual exemption for capital gains more than halved to £6,000 from £12,300 at the start of the 2023/24 tax year on 6 April 2023, and has fallen again to £3,000 from April 2024. It will remain at this level in the 2025/26 tax year. This is the amount you can make in profits before you pay tax on gains from selling an asset.
The 2024 Autumn Budget saw Capital Gains Tax rates increase for investors from 10% to 18% for basic rate taxpayers and from 20% to 24% for higher and additional rate taxpayers, with this change coming into effect on October 31, 2024. However, the 2025/26 tax year will be the first full year where the impact of higher rates will be felt for those who hold investments outside of tax-efficient ISAs. You can find out more about how Capital Gains Tax rules work in our article What is Capital Gains Tax and how do I pay it?
What can you do about it?
If you hold investments outside an ISA and are planning on selling them this year, you may want to first consider moving them into an ISA, via a process known as ‘Bed and ISA’.
A “Bed and ISA” is a service offered by some investment platforms that allows you to sell an investment or multiple investments that you already have in a regular trading account and then to buy them back within an investment ISA wrapper in one process. This way, you retain your investment but get the tax benefits of the ISA as well going forwards.
Find out more in our guide What is a Bed and ISA?
How to reduce your outgoings
Rising taxes are just one of the ways your finances may feel more squeezed over the next financial year.
Inflation remains higher than the government’s 2% target, placing our finances under additional strain. Many of us may therefore be looking at how to save money to help make ends meet. You can find plenty of tips in our article How to save money – 21 money saving tips.
Energy prices are partly to blame for higher than target inflation, with the energy price cap set to increase from £1,717 to £1,738 on 1 January. However, there may be ways you can reduce your costs, or get help with your bills. Read more in our articles The energy bills crisis: What can you do about soaring costs? and Energy saving tips: how to reduce your bills and Are you eligible for help with heating costs?
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