November Questions and Answers
Newsletter issue – November 2026
Q: How can I reduce the tax I'm paying on my substantial savings interest, particularly when the rates go up in April?
A: Most savers can earn some interest tax-free through the Personal Savings Allowance (PSA). Basic-rate taxpayers get up to £1,000 of savings interest tax-free, higher-rate taxpayers get up to £500 tax-free, and additional-rate taxpayers get no PSA. The tax rates on savings interest are increasing to 22% (basic rate) and 42% (higher rate) from April 2027 so it is good that you are thinking about managing your savings more tax efficiently.
If your annual income is below £17,570 then you could qualify for the "starting rate for savings". This gives you up to £5,000 of tax-free savings interest. If you earn less than £12,570 (the Personal Allowance), you get the full £5,000. It reduces, pound for pound, when you earn above the allowance, reducing to zero once you earn £17,570.
You should check that you are using all of your ISA allowance (£20,000), as ISA savings interest is exempt from tax. You can hold a maximum of £50,000 in Premium Bonds, where the "prizes" are tax-free. Most can delay tax payment by putting the maximum £60,000 per year into their private pension. The growth of the pension fund's investments is not taxed, just the withdrawals you make from it, and you can normally take up to 25% (capped at a lump sum allowance of £268,275) tax-free.
Q: I'll be able to access my defined contribution pension soon and wanted to understand the difference between the initial withdrawal options.
A: There are two options available. The main differences between them are the timing and structure of the tax-free cash withdrawal. There is the flexi-access drawdown (FAD), and the uncrystallised funds pension lump sum (UFPLS).
Using the FAD approach, you can take up to 25% of your pension pot tax-free (up to the lump sum allowance cap of £268,275). This is known as your pension commencement lump sum (PCLS). The balance goes into a drawdown fund, meaning it is crystallised and all future withdrawals will be taxed at your marginal rate.
The UFPLS method sees you take lump sums from your uncrystallised pension pot where each payment is 25% tax-free and 75% taxed at your marginal rate. The balance remains uncrystallised.
The UFPLS option triggers the Money Purchase Annual Allowance (MPAA), reducing what you can pay into your defined contribution pension annually to £10,000. If you only take your PCLS and don't start drawing down income as well under the FAD method, the MPAA is not triggered. It will be once you start taking an income.
Which option is best for you depends on several factors. Please get in touch to discuss these with us.
Q: I've heard that you can use a life insurance policy to help pay any inheritance tax bill you might incur. Is this true?
A: There are several policy types you can take out to help cover your IHT bill. A "term life" policy will pay out if you die during the term specified and can be used by your beneficiaries to put towards the IHT bill.
A "whole of life" policy will pay out whenever you die (as long as the policy is still active) but can be expensive and is not widely available.
Then there is the "gift inter vivo" policy which is designed to cover the IHT bill related to a (usually large and exceeding your IHT allowance) gift, should you die within seven years of it being given.
Please get in touch to discuss which option would best suit your circumstances.