Effectively managing your wealth requires a clear understanding of UK tax legislation. But with new rules, changing thresholds and allowances, and rising costs, this isn’t always straightforward.

You might already be noticing that several recent changes are having an effect this tax year.

Even if your income has remained the same, your bill might still rise in 2025/26. This is partly thanks to “fiscal drag”, the effect of frozen thresholds pulling more of your wealth into your tax net.

Continue reading to discover three key changes that might mean you feel the difference this year, and some ways to mitigate their effects.

1. The Dividend Allowance has been cut to just £500

If you hold investments that generate dividends, you’re likely aware that these payments are taxable.

Fortunately, you can make the most of the “Dividend Allowance”, which lets you earn a certain dividend income each year before tax is due.

This allowance has fallen sharply in recent years. In 2022/23, you could earn up to £2,000 in dividends before paying tax. By 2023/24, this had halved to £1,000.

From April 2024, it dropped even further to just £500, where it remains in 2025/26.

This could increase the risk of being taxed on your dividend income, even if your investments haven’t changed.

If you’re a higher-rate taxpayer, any dividend income above your allowance is typically taxed at 33.75%, a significant cost if you aren’t planning ahead.

You might consider reducing your liability by making full use of your £20,000 Individual Savings Account (ISA) Allowance.

Any dividends you earn within an ISA are sheltered from tax, meaning they won’t count towards your £500 limit. If you already own investments outside an ISA, you may want to consider a “Bed and ISA” strategy. This involves selling and repurchasing your investments inside an ISA’s tax-efficient wrapper.

This could help you gradually move your assets into a more tax-efficient location.

2. The Capital Gains Tax Annual Exempt Amount is frozen at £3,000

When you sell assets – such as shares, funds, or second homes – for more than you paid, the gain could be subject to Capital Gains Tax (CGT).

Before CGT becomes payable, though, you benefit from the “Annual Exempt Amount”, which allows you to earn some profit each year tax-free.

This allowance has steadily been reduced over the years. It dropped from £12,300 in 2022/23 to £6,000 in 2023/24. From April 2024, it fell again to just £3,000, and it’s frozen there until at least 2026.

At the same time, CGT rates have risen. From October 2024, gains on most investments are taxed at 18% for basic-rate taxpayers, and 24% for higher-rate taxpayers. This aligns them with property gains (excluding your main home), which were already charged at these levels.

This smaller exemption, paired with higher rates, could mean you find yourself paying more CGT than expected, even on modest gains.

To help manage this, you might want to again consider using your ISA Allowance. As with dividend income, any capital gains realised inside an ISA are tax-free.

You could also transfer assets to your spouse or civil partner. Everyone has their own CGT exemption, so if they haven’t used theirs, or if they pay tax at a lower rate, this could reduce your overall bill.

Transfers between spouses are usually free of CGT, but keeping a record of the original purchase cost is vital, as they may need this when they eventually sell the investment.

3. Income Tax thresholds remain frozen

Income Tax bands haven’t changed for some time. Indeed, the Personal Allowance – the amount of income you can earn before facing tax – has sat its current level of £12,570 since 2021/22. This is expected to remain frozen until 2028.

Meanwhile, the thresholds for basic-, higher-, and additional-rate tax remain unchanged (with the additional-rate threshold actually being lowered in April 2023 to £125,140).

As your income rises, you might find yourself dragged into a higher tax band, with more of your income included over time. This is the effect of fiscal drag.

To limit this, you might want to consider salary sacrifice. This is where you exchange a portion of your salary for non-cash benefits, such as cycle to work schemes or pension contributions.

By reducing your salary, you could pay less Income Tax while boosting your pension contributions and actually increase your take-home pay.

Just be aware of how this might affect other aspects of managing your wealth, such as your eligibility for a mortgage. This is why it might be worth seeking advice from Optimum Path before you commit to reducing your take-home pay.

Get in touch

We could help you manage your tax liability and deal with the potential effects of fiscal drag.

Be sure to contact us now to find out how our Chartered financial planners can help.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances. The Financial Conduct Authority does not regulate tax planning.