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As we approach the end of the 2024/25 tax year, we’re presented with a window of opportunity to review your personal affairs and consider using any tax planning to utilise tax allowances before they are lost.
Income tax
Every individual is entitled to a set of tax allowances in each tax year, including tax free personal allowance, dividends allowance and trading allowance. And it’s in your best interests to maximise your use of these to reduce your annual Income Tax liability. This year, the rates of Income Tax remain the same going into the new tax year and therefore taxpayers with an income of between £100,001 and £125,140 suffer an effective rate of 60% due to the loss of the personal allowance.
Your personal allowance is tapered by £1 for every £2 that your income exceeds £100,000. If you then include the National Insurance Contributions (NIC) payable on this income, the effective rate increases will be 62%, with an additional rate of 2% applied for Class 1 NIC for employees and Class 4 NIC for those who are owners of unincorporated businesses. Therefore, it’s important to consider ways in which you can reduce your taxable income and mitigate your annual tax bill.
How to optimise your tax position
Pension contributions
Both an effective way to avoid the higher rates of income tax and to positively impact your long-term financial position. A contribution to your pension will attract a 20% top-up payment from HM Revenue and Customs within the pension scheme, whilst your Income Tax bands increase by the gross contribution. This can be a very effective way to reduce the impact of the effective 60% tax rate.
As an example
Mark receives an annual taxable income of £110,000 and is therefore paying an effective rate of tax of 60% on £10,000 of his income. If Mark made a gross contribution of £10,000 to his pension fund, the point at which his personal allowance is tapered would be increased to £110,000 and he would therefore not be subject to 60% tax. To make a gross contribution of £10,000 Mark would need to actually pay £8,000 into his pension (basic rate tax would then be reclaimed by the pension), Mark would save tax personally of £4,000 and the cost to Mark is therefore £4,000 whilst increasing his pension pot by £10,000.
There is a limit to the amount you can invest into your pension fund in each tax year, known as the pension annual allowance. Currently an individual can contribute £60,000 within the year into their pension without incurring an income tax charge. This includes contributions into an Occupational Pension Scheme and a Self-Invested Personal Pension. You can also utilise any unused pension annual allowances from the previous three tax years (2021/22 onwards) for 2024/25.
However, this annual tax-free pension allowance will be reduced if the sum of your taxable income and employers pension contributions exceeds £240,000. So, it’s important to review your pension annual allowance for the year to make sure you don’t exceed your annual allowance and suffer a tax charge.
ISA allowances
The 2024/25 ISA savings limit remains at £20,000 for individuals and £40,000 for married couples. These limits apply per tax year and cannot be carried forward. If you have not utilised your ISA savings limit for the 2024/25 tax year, then you should consider whether you can optimise your investments by taking advantage of the tax-free wrapper available. Unused allowances are not carried forward to future tax years so it’s a case of use it or lose it. And with rumours circulating that the Labour Government are open to lowering or abolishing the annual ISA tax-free allowance, now’s the time to make sure you’ve considered whether utilising your ISA allowance is beneficial to your circumstances.
Tax efficient investments
Some qualifying investments benefit from income tax relief on the amount invested. And the below summarises the benefits of making such investments. But these won’t be suitable for everyone, so it’s important to seek out financial advice on what best suits your circumstances.
Venture Capital Trusts (VCTs)
- Investments of up to £200,000 per year qualify for Income Tax Relief at 30%.
- There is no Capital Gains Tax payable on any profit made when selling the investment.
- Dividends from VCT investments are received tax-free.
Enterprise Investment Scheme (EIS)
- Annual investments of up to £1 million in qualifying companies attract Income Tax Relief at 30% (or up to £2 million if at least £1 million is invested in knowledge intensive companies).
- There is no Capital Gains Tax payable on any profit made when selling the investment if the investment is held for over three years.
Seed Enterprise Investment Scheme (SEIS)
- Investments of up to £100,000 per tax year can be made in start-up companies that qualify for the SEIS.
- Income tax relief is available at 50% on SEIS investments.
- Any profit made on an SEIS investment is exempt from Capital Gains Tax if the investment is held for over three years.
Gift Aid
Gift aid donations work in a similar way to pension contributions in that they extend your tax bands. So, a higher rate or additional rate taxpayer’s annual tax liability can be reduced by 20% or 25% of the grossed-up charitable donation. These payments can also help to reinstate your personal allowance alongside personal pension contributions. Gift Aid also allows the charity to claim an additional 25p from HM Revenue and Customs for every £1 you donate.
Tax planning to consider ahead of 2025/26
Remuneration planning
Recent tax changes continue to make profit extraction strategies for shareholders in family companies a complex matter. There is an increased need for bespoke planning as there are numerous factors that can impact the best strategy. So, it’s important to review your remuneration planning before the end of the tax year to be sure you’ve maximised allowances.
Jointly held assets
If your marginal rate of income tax is different to your spouse’s, then it may be appropriate to consider whether any of your assets should be held jointly, or in your spouse’s sole name to reduce the overall tax liability. If an asset is jointly held between spouses, the income generated is then shared equally between each individual. A transfer of an asset can be made between spouses under the no gain/no loss rules which means such transfer can also be made without any Capital Gains Tax implications.
High Income Child Benefit Charge
From 6 April 2024, the income thresholds for the High Income Child Benefit Charge (HICBC) increased, opening the possibility of receiving Child Benefit payment in many more households. The HICBC now applies where the adjusted net income is over £60,000 (previously £50,000). Adjusted net income is broadly your taxable income after you have deducted personal pension contributions and Gift Aid payments. Child Benefit is clawed back at a rate of 1% for every £200 of income above £60,000. Therefore, if your income exceeds £80,000, the full amount is clawed back and all financial benefit of receiving payment is lost.
The HICBC still remains chargeable on the higher earning partner, irrespective of whether they are the Child Benefit recipient. So, where couples run their finances independently, and one party doesn’t know the other claims Child Benefit, this can cause particular problems. If you are in receipt of Child Benefit, you should ensure that you check the projected taxable income of you and your partner to avoid any unexpected tax charges in your Self-Assessment Tax Return. Pension contributions can be a useful way of lowering your adjusted net income to below the HICBC threshold.
Capital Gains Tax
The annual exemption available to most individuals in the 2024/25 tax year is £3,000 and should be utilised wherever possible before the 5 April. Given the annual exemption has been reduced by 50%, it’s likely more individuals will be due to pay Capital Gains Tax on disposals made within this current tax year. Therefore, if you’ve made total Capital Gains over the £3,000 annual exemption, you’ll be required to report and pay Capital Gains Tax through a Self-Assessment Tax Return by the 2024/25 self-assessment deadline of 31 January 2026.
FIG Regime
The FIG Regime comes into effect from 6 April 2025 to abolish the non-domiciled status from the UK Tax system. You can read more about the impact of these changes here. But if these rules will impact your tax position and you have not yet reviewed your current arrangements, please reach out to our tax team to discuss your personal situation in more detail.
Get in touch We can provide support with all of the above topics to help mitigate your tax position both for the short and long-term with specialised advice on your affairs. Contact Simon or one of the team by calling 0330 058 6559 or by emailing hello@scruttonbland.co.uk
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