4 tax mistakes that can cost £1,000s – and how to avoid them
You cannot completely avoid taxes if you live in the UK. Yet, our financial planners in London, Grantham and Leicester encounter people every day who are overpaying – often without realising.
The impact can be significant: retirement needlessly delayed, incomes eroded and wealth held back from its full growth potential. It does not need to be this way.
Armed with the right financial education, some individuals could save £1,000s with just a few simple adjustments to their financial plans. Below, we identify four common tax mistakes that could be holding you back in 2025, and what to do about them.
#1 Neglecting ISAs
The Individual Savings Account (ISA) is one of the most powerful ways to save on tax, yet it is widely misunderstood or ignored. As a result, savings and returns get undermined.
In 2025-26, you can contribute up to £20,000 per year in total to your ISAs. For instance, you could put £10,000 into your Cash ISA, £8,000 into your Stocks & Shares ISA and £2,000 into your Lifetime ISA. Any interest, dividends or capital gains earned from your assets within these “wrappers” will be free of their respective taxes.
Around 60% of the UK population currently does not use an ISA. This is largely down to a lack of public awareness. Yet, armed with knowledge, you could now take better steps towards your goals using these tax-efficient vehicles.
For example, if your goal is to save for a first mortgage deposit, the Lifetime ISA (“LISA”) could be an attractive option. An individual can commit up to £4,000 to their LISA each tax year. The UK Government will then “top up” the contributions by 25%, up to £1,000.
#2 Ignoring CGT planning
As an investor, you should be concerned about the potential impact of tax on your returns. If you are taxed 24% on a capital gain of £10,000 (i.e. the higher / additional rate), then you stand to lose £2,400 from your hard-earned returns. Why accept that, if it could be avoided?
In many cases, CGT can be mitigated. One great way to do this is via your Annual Exempt Amount, which lets you earn up to £3,000 from capital gains outside of an ISA, pension or other tax-efficient structure without needing to pay CGT.
One idea to maximise this allowance is to spread out asset disposals across multiple tax years (if you can afford to wait). Another option is to transfer/gift assets to your spouse or civil partner, who can then utilise their own CGT-free allowance to sell them for a profit.
#3 Inefficient use of pensions
Pensions are incredibly powerful tools for retirement saving and investing. In 2025-26, you can contribute up to £60,000 each year to your pensions via your annual allowance and claim tax relief (or up to 100% of your earnings – whichever is lower).
This tax relief is equivalent to your highest marginal rate of income tax. For instance, a higher rate taxpayer can claim 40% tax relief. In effect, this means it only “costs” this person 60p to put £1 into their pension. I.e. the money that should have gone to the government goes to you.
Moreover, pensions can help you save on tax in the short term, particularly via salary sacrifice. Here, you agree with your employer to reduce your salary in exchange for higher employer pension contributions. This can save on National Insurance (NI) for both sides, and it can even let you keep more of what you earn.
#4 Failing to plan your estate
Tax planning isn’t just about your immediate financial situation. It also concerns your future plan for your legacy and beneficiaries. In particular, what will you do about inheritance tax (IHT)?
In 2025-26, the standard IHT rate is 40% on the value of a deceased person’s estate once it exceeds £325,000. Assuming no other allowances, this means a £500,000 estate would face an IHT bill of £70,000 upon death.
The good news is, there are many options to mitigate IHT in 2025-26 (even with various rules changing to make estate planning more restrictive). One prominent strategy is to use the residence nil rate band to help pass down up to £175,000 more equity to your direct descendants without IHT.
Another option is to use gifts throughout your lifetime to reduce your chargeable estate.
You can give away up to £3,000 per year like this, potentially resulting in a £30,000 reduction in your estate over 10 years. This alone could allow one person to save £12,000 in IHT.
Married people and those in civil partnerships also enjoy the huge advantage of being able to inherit their deceased spouse’s estate completely free of IHT. Any unused IHT allowances can also be passed over. In theory, this could allow the surviving spouse to accumulate a combined “nil rate band” of £650,000 (i.e., £325,000 x 2).
These are just a handful of ideas for potentially reducing your tax bill in 2025-26 and beyond. For these best results, we recommend speaking with a financial adviser who can guide you in light of your unique financial goals and situation.
If you’d like to make sure you’re taking the right steps to safeguard your financial future, please get in touch.
Please note:
The information in this article is for general guidance only and does not constitute personal financial or tax advice. Readers should seek independent financial advice before acting on any plans. Tax treatment depends on individual circumstances and is subject to change. Your capital is at risk. Investments can go down as well as up, and you may not get back the amount you invested. Past performance is not a reliable indicator of future results. The Financial Conduct Authority does not regulate will writing, trusts, or estate planning services.
