The final months and weeks in the approach to tax year end can be quite busy here at Jane Smith Financial Planning.
Arguably more so this year, following Labour’s Autumn Budget and Spring Statement, and the moving parts and “blink and you’ll miss it” changes coming out of the White House.
With spring officially here and the new tax year upon us, you might think it’s time to take a deep breath and relax. Sadly, that might not be the case.
While it’s all too easy to focus on the last-minute rush to take advantage of allowances before a new tax year arrives, you might actually find that some of the most financially damaging mistakes happen soon after 5 April, in the early days of a new tax year.
Keep reading to find out why this might be the case and for a closer look at three mistakes to avoid.
1. Thinking you can forget about your ISA Allowance for another 11 months
In the financial planning profession, the lead-up to tax year end is known as “ISA season”.
ISAs are incredibly tax-efficient. You don’t pay tax on Cash ISA interest, while any gains you make in a Stocks and Shares ISA are free of both Income Tax and Capital Gains Tax (CGT).
For the 2025/26 tax year, you have a £20,000 ISA Allowance spread across all ISAs you hold. If you don’t use this full allowance by April 5, 2026, you lose it. Note that the Lifetime ISA Allowance (LISA) and Junior ISA (JISA) allowances are lower, standing at £4,000 and £9,000 respectively for the 2025/26 tax year.
With ISA season over for another year, you might think you don’t need to worry about your ISA savings and investments for a while. But this would be a mistake.
Research reported by This is Money has looked at the difference between investing at the start versus the end of the tax year. It finds that by investing £20,000 at the start of each tax year for 10 years, you could have amassed £338,333 (from an overall investment of £200,000).
Making the same investment at the end of the tax year each year would have left you with just £306,476, a “shortfall” of almost £32,000.
Investing early increases the size of your fund more quickly, meaning a longer investment period and a higher fund on which to see investment returns and the effects of compounding.
2. Underestimating the benefits of pound-cost averaging and failing to make regular contributions
You might not have had a spare £20,000 to invest immediately on 6 April. Even if you did, it might have been earmarked for elsewhere.
Interestingly, you don’t need to make large one-off deposits to benefit from being proactive at the start of a new tax year.
This is Money also published figures showing the gains from a £20,000 ISA investment split into regular deposits throughout the tax year.
After 10 years, this approach would have seen you amass returns of £314,453. That’s around £8,000 more than you could return by investing £20,000 during March’s ISA season each year.
Again, this is because you’re building up your investment fund earlier in the year, giving your fund more time to grow through investment returns and compounding.
Drip-feeding investments in this way is known as “pound-cost averaging” and it has several benefits.
The stock market rises and falls daily, so by investing little and often over the long term, you’ll sometimes buy units when prices are high, and occasionally when they are low. While this means that sometimes your money will buy fewer units than others, it also helps to smooth out volatility and reduce your risk. Over time, you’ll buy your investments at average market price and be cushioned from the impact of severe drops.
3. Not understanding the allowances that apply to you and planning accordingly
ISAs aren’t the only tax-efficient wrappers you might hold, and there are several other allowances you should be aware of too. Here’s a brief rundown:
Pension Annual Allowance
Your Annual Allowance is the total amount you can contribute tax-efficiently to your pensions in a single tax year without facing an additional tax charge.
For 2025/26, it stands at £60,000 or 100% of your earnings, whichever is lower.
Drip-feeding contributions and planning to make full use of your allowance each year will help you maximise your pension tax efficiency.
Money Purchase Annual Allowance
It’s worth noting that your Annual Allowance may be lower if your income exceeds certain thresholds, or you have already flexibly accessed your pension.
Withdrawing pension funds using certain “flexible” options could trigger the Money Purchase Annual Allowance (MPAA). This reduces your Annual Allowance to just £10,000, which could significantly affect your plans for the year ahead.
Tapered Annual Allowance
The Tapered Annual Allowance effectively reduces your Annual Allowance by £1 for every £2 of “adjusted” income above £260,000 so is something to consider if you’re a high earner.
The reduction continues until your allowance reaches just £10,000.
Other allowances to be aware of
- Your Personal Allowance is the maximum amount you can earn before you start paying tax. It stands at £12,570 for 2025/26.
- The Dividend Allowance has fallen in recent years and currently stands at just £500 this tax year.
- The Capital Gains Tax (CGT) Annual Exempt Amount is £3,000 for the 2025/26 tax year but note that CGT rates increased from 30 October 2024.
The basic rate of CGT increased from 10% to 18% and the higher rate increased from 20% to 24%.
- Basic-rate taxpayers have a Personal Savings Allowance (PSA), which allows them to earn up to £1,000 of interest tax-free. Higher-rate taxpayers can earn up to £500, while additional-rate taxpayers don’t qualify for a PSA.
- Several HMRC gifting exemptions allow you to give gifts tax-free and remain unchanged for 2025/26, including your £3,000 annual exemption.
Being aware of these allowances and thresholds at the start of a new tax year allows you to make plans now and avoid any costly mistakes or last-minute panics come April 2026.
Get in touch
If you’re looking for an independent financial adviser in Milton Keynes or Olney to help you plan tax-efficiently for 2025/26, look no further. At Jane Smith Financial Planning, we’ve been helping clients for 30 years, so contact us at info@janesmithfinancial.com or call 01234 713131 to see what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
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