A guide to personal tax planning in 2024/2025
Navigating your finances with confidence
Entering the 2024/25 tax year, taking a proactive stance on personal finance management has become increasingly crucial.
Navigating the complexities of income tax, evaluating investment opportunities, or planning for the future requires a solid understanding of the UK tax system. Our guide to personal tax planning is designed with your needs in mind, providing clear and practical advice to assist you in optimizing your tax situation. The foundation of effective personal tax planning is a solid understanding of your tax obligations.
The UK tax system can appear intimidating initially, but understanding the fundamentals can better equip you to recognize opportunities for savings.
Income tax: Know your rates and allowances
Income tax is charged on various forms of income, including wages, pensions and savings interest, but everyone is entitled to a personal allowance — the amount that can be earned before paying income tax. Be aware, that those earning above £100,000 have a reduced personal allowance.
For the 2024/25 tax year, this allowance remains at £12,570. Beyond this, tax bands are applied progressively, meaning the more you earn, the higher the rate of tax you will pay on your income over the allowance.
- Basic rate (20%) applies to income over £12,570 up to £50,270.
- Incomes between £50,271 and £125,140 are subject to a higher tax rate of 40%.
- Additional rate (45%) affects income above £125,140.
Understanding your tax bracket is the first step to managing tax liabilities effectively.
Personal Savings Allowance and Dividend Allowance
For savers and investors, the Personal Savings Allowance (PSA) and Dividend Allowance present opportunities to earn income with favourable tax treatment.
The PSA allows basic rate taxpayers to earn up to £1,000 in savings interest without paying tax, which decreases to £500 for higher-rate taxpayers.
A higher tax rate of 40% is applied to income ranging from £50,271 to £125,140.The Dividend Allowance allows for £500 of dividend income to be earned tax-free, irrespective of one’s income tax bracket.
Marriage allowance
Married couples and those in civil partnerships could be eligible to apply for the marriage allowance.
Individuals whose earnings are insufficient to make full use of the personal allowance can transfer the unused portion to their spouse or civil partner, within a specified limit. This benefit is not available if the recipient spouse or partner pays tax at the higher or additional rate.
For the tax year 2024/25, the maximum transferable amount is £1,260.
Maximising your allowances
One of the simplest and most effective tax planning strategies is to make sure you’re fully utilising all available allowances.
ISAs: A tax-efficient haven for your savings
Individual savings accounts (ISAs) remain a cornerstone of personal tax planning. With a generous annual allowance of £20,000 for the 2024/25 tax year, ISAs offer a tax-efficient shelter for your savings and investments, with no tax on interest, dividends or capital gains.
Whether you opt for a cash ISA, stocks and shares ISA, or the innovative lifetime ISA, this allowance can significantly enhance your wealth, tax-free.
In the Spring Budget 2024, the Government announced the introduction of the UK ISA. The new £5,000 allowance, in addition to the existing ISA allowance, will provide a new tax-free savings opportunity for people to invest in the UK.
Pension contributions: Investing in the future
Contributing to a pension not only secures your future but also offers immediate tax relief. Contributions are topped up by the government at your highest rate of income tax, making it one of the most tax-efficient forms of saving.
For the 2024/25 tax year, the annual allowance for pension contributions increases to £60,000, or 100% of earnings, whichever is lower. Utilising this allowance reduces taxable income and the amount of tax owed; the allowance is also be tapered down for high earners.
Planning for capital gains
Capital gains tax (CGT) is levied on the profit made when a sale or the ‘dispose of’ an asset that has appreciated in value. It is important to point out, it’s the profit or ‘gain’ from the sale that is subject to taxation, not the total amount of money received from the sale. The essence of CGT is to tax the increase in value of an asset from the time acquired to the time it is sold, covering a wide range of assets including property, stocks and shares, among others.
For the fiscal year 2024/25, there is an annual exempt amount set at £3,000. This exemption allows individuals to realise gains of up to this limit without paying any CGT. This threshold provides a strategic opportunity for taxpayers to manage assets in a tax efficient manner. By planning the sale of assets, such as real estate, stocks or collectables, individuals will ensure that gains do not exceed the exempt amount in any given tax year, thereby avoiding CGT on those gains.
Strategic planning involves timing the sale of assets to take full advantage of the annual exemption.
For instance, if an individual anticipates a gain that exceeds the exemption limit, they could consider spreading the disposal of assets over multiple tax years. This allows for the utilisation of the annual exempt amount in each year, potentially reducing the overall tax liability.
Inheritance tax planning: Safeguarding your legacy
Inheritance tax (IHT) planning is a crucial aspect of long-term financial planning. With the IHT threshold frozen at £325,000, any estate valued above this amount may be subject to a 40% tax rate on the excess.
Strategies such as gifting, placing assets into trust or investing in IHT-efficient investments can mitigate potential tax liabilities.
Contact an accountant or financial advisor to discuss the additional exempt amount for residential properties, in addition to the standard £325,000, as the vast majority of people with inheritance tax liabilities also have a residential property.
Navigating changes and seeking professional advice
The tax system is constantly changing. Every Budget brings with it changes to allowances, rates and tax reliefs. It’s important to stay on top of these changes so you can plan your tax affairs in the best way possible. However, the intricacies of tax legislation mean that personalised tax advice from a tax expert can be invaluable. A tailored approach, taking into account your individual circumstances and objectives, can help you to maximise your tax efficiency and financial well-being.
As we navigate the 2024/25 tax year, remember that effective tax planning is a continuous process. By understanding your obligations, utilising available allowances and seeking professional advice, you can take control of your financial future with confidence.
Here are a few ways an accountant can assist in navigating changes:
- Identifying opportunities for tax savings: An accountant can review your financial situation to identify any opportunities to save on taxes. This could include making use of all available allowances, deductions and reliefs that you may not be aware of.
- Staying compliant: With tax laws constantly changing, an accountant ensures that you remain compliant, avoiding penalties and fines. This involves not just understanding current laws but also keeping an eye on upcoming changes that may affect your financial planning.
- Strategic financial planning: Accountants can assist in long-term financial planning, including retirement planning, investments and business growth strategies, ensuring that tax efficiency is considered at every step.
- Risk management: By understanding the nuances of tax legislation, accountants can help identify potential risks to your financial health and suggest strategies to mitigate them.
- Representation in tax investigations: Should you face a tax investigation, having an accountant can be invaluable. They can represent you, handle communications with tax authorities, and ensure the process is as smooth as possible.
Tailored advice for major life events: Whether you’re selling a property, starting a business or planning for retirement, an accountant can provide personalised advice to optimise your tax position during significant life events.
Educating on financial decisions
An accountant doesn’t just manage your finances, they can also educate you on the implications of financial decisions, helping you to understand complex tax issues and enabling informed decision-making.
Talk to an expert
By leveraging the expertise of an accountant, you can navigate the complex tax landscape with greater ease and confidence, ensuring that your financial planning is both compliant and optimised for your specific situation.
Need assistance? Get in touch for advice on your personal tax planning.
For the latest tax rates and allowances, download our 2024/25 tax card.