As the 2024/25 tax year draws to a close, it is a good time to ensure you are maximising your personal tax position by 5 April. This is particularly important in light of the significant changes introduced by the 2024 October Budget.
While tax planning is always dependent on your individual circumstances and should be reviewed by a professional adviser, we have outlined below a few points that you may wish to consider.
1. Equalising your income
If you are married or in a civil partnership, it may be worth considering if you can share your income with your partner by gifting some of your income producing assets to them in order to save tax.
If you are a higher or additional rate taxpayer, it may be worth moving some income producing assets to your spouses/civil partner if they pay tax at lower rates.
It should be possible to spread income producing assets between spouses and civil partners tax efficiently, but care will be needed that this is structured properly to avoid any unintended tax liabilities.
2. Changes to Capital Gains Tax (CGT)
Business Asset Disposal Relief (BADR)
The October Budget introduced important deadlines for anyone planning to sell their business or business assets. Capital gains benefiting from BADR are currently taxed at 10% but is set to rise to the following:
- 14% from 6 April 2025 to 5 April 2026
- 18% from 6 April 2026
Business owners planning their exit strategies should consider if it is appropriate to act now to lock in the more favourable rates of relief.
Furnished Holiday Lets (FHLs)
The tax advantages enjoyed by FHLs will be abolished at 5 April 2025. In advance of this, those with FHLs may wish to consider that:
- FHLs will no longer be eligible for BADR after 6 April 2025. Sellers could pay up to 24% in Capital Gains Tax on sales of FHLs after this date, an increase of up to 14% on the previous rate. For those planning to sell their FHL it may be preferable to do so before the end of the tax year.
- If you are unable to sell your FHL prior to 5 April 2025, you can still benefit from the BADR tax rates if you cease letting your FHL by 5 April 2025 and then sell the property within three years. Please note the increase to BADR rates as detailed above.
- If you own an FHL with a spouse/civil partner, the profits from 6 April 2025 will automatically be assumed to be 50:50. You may wish to consider if it would be beneficial to make an election for the profits to be split based on actual ownership.
- When planning these transactions, care should be taken not to fall within anti-forestalling provisions which prevent taxpayers from gaining tax relief by artificially manipulating the dates on which transactions involving FHLs take place.
3. Utilising Allowances and Reliefs
CGT Annual exempt amount
The tax-free annual exempt amount for 2024/25 is set at £3,000. As the annual exempt amount cannot be carried forward, taxpayers who have not yet utilised their tax-free amount may wish to consider making use of this.
Savings and dividend allowances
Basic rate taxpayers are entitled to a £1,000 tax-free savings allowance for their interest income. The amount is reduced to £500 for higher rate taxpayers and is further reduced to nil for additional rate taxpayers.
Although it has significantly reduced, taxpayers continue to benefit from an annual tax-free dividend allowance. The dividend allowance for 2024/25 is £500.
Company profit extraction
For the owners of companies, it is important to check if the conventional strategy of low salary and high dividends is still tax efficient. This is not always the case, particularly in light of changes in National Insurance rates, and it is important that this is reviewed to determine if there are better ways to extract funds from the company.
Individual Savings Accounts (ISAs)
As tax free allowances have been significantly outpaced by the rise in interest rates, we are seeing many more people paying much more tax on their investment income. Would an ISA help?
Each adult can invest up to £20,000 each tax year in an ISA and any interest, dividends or gains generated within the ISA wrapper are tax-free.
There are four types of ISAs designed to hold different kinds of assets:
- Cash ISAs
- Stocks and shares ISAs
- Innovative finance ISAs
- Lifetime ISAs (18 to 39 years of age)
You can allocate your £20,000 ISA allowance between these four types of account, although the maximum that can be contributed to a lifetime ISA is £4,000 per year.
The £20,000 allowance cannot be carried forward, so it is worth reviewing each year whether you would like to top up your ISA.
If you have children under 18 who are living in the UK, you can also gift up to £9,000 per tax year per child into a junior ISA.
Income Tax thresholds and traps
Where your level of income puts you either just above the basic or higher rate Income Tax band thresholds then you may wish to minimise the impact by claiming income tax relief on Gift Aid donations, pension contributions or tax efficient investments.
Income Tax relief will be even more valuable if you are within the tapering thresholds for:
- The High-Income Child Benefit Charge (£60,000 – £80,000), where Child Benefit is clawed back or
- The tax-free childcare threshold of £100,000 a year (where you lose the 25% Government top-up if at least one parent earns more than £100,000) or
- The Personal Allowance threshold (£100,000 – £125,140), where the Personal Allowance is tapered away at £1 for every £2 over that threshold.
If you tip over into these thresholds the effective rate of tax can be upwards of 60%.
Below are some ways that you may be able to mitigate this:
4. Gift aid
For those who have made gifts to charities during the tax year, it is worth keeping a record of these donations and making sure that you have claimed gift-aid. For example, if you are a higher rate taxpayer, your basic rate band will be extended by the gross value of the donation, meaning you will effectively receive tax relief equivalent to 25% of the amount you have donated.
5. Pensions
Making personal pension contributions to your pension policy also provides income tax relief for higher rate and additional rate taxpayers. The income tax relief works in much the same way as for Gift Aid. Your pension policy benefits from the gross contribution made.
It is important to take care not to breach the pension annual allowance, as this will negate the income tax relief that you receive on the net pension contribution.
Please remember to review if you have any unused annual allowance for the 2021/22 tax year as this will be lost if not utilised by 5 April 2025 (it can only be carried forward for three tax years).
6. Tax efficient investments
Subscribing for Enterprise Investment Schemes (EIS), Seed Enterprise Investment Schemes (SEIS) and Venture Capital Trusts (VCT) shares can provide generous upfront Income Tax relief ranging between 30% and 50% of the value of the subscription. CGT reductions or deferral is also available.
In addition, any future gains realised on a future disposal of the EIS and SEIS investment may be exempt from CGT entirely.
If you are planning on making tax efficient investments, we can help you review the tax consequences and optimise the level of investment from a tax perspective. Of course, independent financial advice is always recommended before making any investment decisions.
7. Review Your National Insurance Contribution Record
Currently, any men born on or after 6 April 1951 and women born on or after 6 April 1953 can top up any gaps in their pension contribution between 6 April 2006 and 5 April 2018 to fill in any gaps in their National Insurance record, but this concession is due to expire on 5 April 2025. After that date, it will only be possible to make voluntary contributions for the past 6 tax years.
8. Inheritance Tax (IHT)
Currently, IHT is payable at 40% where a person’s assets on death, together with any gifts made during the seven preceding years, total more than the nil rate band (NRB) and the Residence Nil Rate Band (RNRB). The NRB is currently £325,000 and the RNRB is up to £175,000; they are fixed at this level until April 2028.
Whilst IHT planning can be complex, it is important not to lose sight of simple annual IHT exemptions available to you in each year. This includes the small gifts exemption of £250, or the annual IHT exemption of £3,000 (or £6,000 if the previous year’s exemption is unused, as you can carry it forward for one tax year).
IHT exempt gifts in consideration of marriage should also not be forgotten (£5,000 to children, £2,500 to grandchildren and £1,000 to anyone else).
Please also review your Wills to make sure they are still valid and do what you want them to do, and both protect and benefit those dear to you.
If you have any questions on how to prepare for the year end, please contact us.
This article was correct at the time of publishing.
