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With frozen tax thresholds pushing people into paying more tax, the legal ways you can avoid tax are becoming more important than ever.
New figures show that ISAs have saved taxpayers £9.65 billion in tax in the 2025/26 tax year. Meanwhile, the cost of pension tax relief has surged to nearly £60 billion.
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ISAs have long been popular with British savers, but their importance has grown significantly. Cash ISAs are shielded from income tax on the interest, while stocks and shares ISAs are protected from capital gains tax and dividend tax.
While lower interest rates following Bank of England rate cuts mean that the total tax saved by ISAs is slightly down (by 1%) on last year, it’s up 45% from two years ago, when it was £6.65 billion. And it’s more than double the amount of five years ago, when it was £4.1 billion.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “This rise owes a great deal to the ramping up of taxes by successive governments. The capital gains tax annual allowance has been slashed from £12,300 to £3,000 last year, and the dividend allowance from £2,000 to £500. This has been followed by a hike in the capital gains tax rate on stocks and shares, which automatically increases the amount of tax saved by holding investments within an ISA.”
She added: “The enormous popularity of both stocks and shares and cash ISAs in the past year has helped to add to the billions of pounds of tax saved by savers and investors. It’s a useful reminder of how vital it is to consider tax when you’re planning for the future.”
These figures also highlight why tax reliefs should never be taken for granted. The sheer cost of these reliefs makes them a target for a Treasury looking to make savings.
In the November 2025 Budget, the chancellor announced a future cut to the cash ISA allowance for under-65s, reducing it from £20,000 to £12,000 from April 2027.
The change has been billed as a way of encouraging savers to invest instead. But Jason Hollands, managing director of Bestinvest, believes the new HMRC data sheds light on the government’s real motivation.
“The insights from these tax relief statistics will only raise suspicions that the real motivation to cut the cash ISA allowance is to curtail the ‘cost’ to the Treasury of ISA tax reliefs,” he said.
He warned that with the "UK tax burden at a record post-war high," using the current £20,000 allowance is critical before the rules tighten.
“With the end of tax year deadline getting ever closer, people would be wise to act to utilise their current year ISA allowance,” Hollands added.
While ISAs are hugely popular, pensions offer the single biggest tax relief by total value. The total cost of pension tax relief is estimated at £59.1 billion for 2025/26, a jump of almost £11 billion in the last five years.
Income tax relief (both on contributions and on the tax-free lump sums people can withdraw from their pensions) accounts for £33.5 billion of this, with national insurance tax relief making up the rest.
Charlene Young, senior pensions and savings expert at AJ Bell, said: “Pension tax relief means no income tax on your own contributions today, instead you are taxed when you take the money out of your pension in retirement. That’s after another incentive – tax-free cash – which is usually up to 25% of your pension value when you access it. That deferral is a major incentive, since most people will have a lower income, and therefore less of a tax liability, when they’re retired.
“The income tax relief figures include the upfront tax relief on pensions contributions, but also the cost of the tax-free protection of pension wrappers and the value of pension tax-free cash.
She added: “In economic terms, [pension tax relief] translates to roughly 2% of the UK’s GDP.”
The rise is partly due to wage inflation leading to higher pension contributions, but also rule changes that have encouraged bigger payments into pensions. The abolition of the lifetime allowance (the maximum amount you could pay into your pension with tax relief) in 2023, and an increase in the annual allowance (from £40,000 to £60,000) in the same year have encouraged those with deeper pockets to top up their retirement pots.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, described tax relief as the “hidden hero” of pensions.
“It means a basic-rate taxpayer contributing £80 will have it boosted up to £100 by tax relief. A higher rate taxpayer needs to contribute just £60 to get the same boost to £100,” Morrissey explained.
She issued a reminder to higher-rate taxpayers – a group that is growing due to frozen tax thresholds. While basic rate relief is applied automatically, you may need to claim the rest. “With the self-assessment deadline looming, it is an important reminder for higher and additional rate taxpayers to make sure they aren’t missing out on claiming their full rate of tax relief on their pensions,” she said.
These rises in the value in tax relief are part because more people are being dragged into paying higher taxes. When tax thresholds are frozen, wage rises (or pension income increases) push more income into taxable bands.
David Little, partner in financial planning at Evelyn Partners, said: “With the long-term freeze of tax bands and allowances, along with the dreaded £100k tax trap remaining unchanged in nearly 16 years, it’s hardly surprising that much more pension tax relief is being claimed.”
Little points out that while the Treasury might wish to cut this relief to save money, doing so is risky.
“Watering it down could dent faith in the private pension system and potentially hit savings rates at the very time that a Pensions Commission has been instructed to figure out how to get people saving more,” he said.
The data shows that the personal savings allowance is on track to save taxpayers £800 million this year. This allows basic rate taxpayers to earn £1,000 in savings interest tax-free each year, and higher rate taxpayers £500.
But with interest rates still relatively healthy, that allowance can get used up quickly if you have significant savings.
Sarah Coles warned: “We can’t afford to rely on this allowance though, not least because frozen income tax rates have pushed more people into higher tax bands, where their personal savings allowance has halved or disappeared overnight.”
The marriage allowance is estimated to be worth £590 million this year, and the numbers claiming it have been steadily increasing. This is where one person whose income is below the personal allowance of £12,570 transfers 10% of their allowance to their higher-earning spouse. It can save up to £252 a year. In 2023/24, the last year for which claimant figures are available, 2.44 million people claimed it.
It can be backdated for up to four years, so if you’re eligible, make sure you claim. You can apply online on the government website.
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