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How to pay less tax: utilise your 2024/25 tax allowances

Are you making the most of tax allowances and thresholds? You might not even understand how to tax-efficiently plan your finances? That is ok, but if you let another year pass where you don't effectively plan to make the most of your financial situation this will have another year's impact on you, your family or business. Just start off by reading our overview of how to make the most of the tax year end. One step at a time, small incremental progress can have a bigger impact on how you manage your money.

Need support with your tax allowances?

Personal Income Tax Allowance

The personal allowance for 2024/25 tax year is £12,570, meaning you can earn up to this amount without paying any tax. This can be used against your State Pensions, any income which you are drawing down from your private pension arrangements as well as your other investments or cash savings which are liable to income tax. The personal allowance is reduced by £1 for every £2 of earnings above £100,000. If you earn £125,140 or more, it is lost completely and income tax will be paid on all of your income. You might not understand a lot of this, don’t fret, that is why we are here to help. If you do, however and you manage your own finances check out our financial planning idea below.

Financial Planning Idea:

If you are affected by this, it is worth considering making pension contributions or charitable donations to reduce your tax liability.

Starting rate for savings & ISA Allowance

The starting rate for savings means you can earn up to £5,000 (2024/25) from savings before you pay any tax. It is designed to help those on lower incomes so the £5,000 is reduced by £1 for every £1 of income you earn over the annual allowance. However, in combination with the personal allowance of £12,570 it means you could earn up to £17,570 a year tax free in savings across both.

You can also make full use of the ISA allowance. For 2024/25 the maximum investment is £20,000, and for children under the age of 18 the JISA allowance is £9,000. The annual ISA limit can be split between cash and permitted investments, such as stocks and shares.

Find out more about saving for children

Financial Planning Idea:

Your adviser can discuss with you how our solutions can give you flexibility around income. Everyone’s financial situation is unique, for example, if you are drawing down income from your pension it may be possible to suppress this income in a tax year if you needed to encash an investment bond where the gains are categorised as savings and could make use of this allowance.

Allowances for savers

Savers are able to grow their money tax free as a result of the Personal Savings Allowance.  This allows you to earn up to £1,000 interest tax-free if you’re a basic-rate (20%) taxpayer, or £500 if you’re a higher rate (40%) taxpayer. Additional-rate taxpayers don’t receive a personal savings allowance, so if you earn more than £125,140 each year, you’ll pay tax on all your savings.

Financial Planning Opportunity:

Using the savings allowance against any cash savings you have, including your emergency fund, could generate tax free income for you. If you are a higher or additional rate taxpayer,
consider tax planning opportunities which could bring you into a lower bracket and save you money.

Dividend Allowance for business owners and/or shareholders

You do not pay tax on any dividend income that falls within your personal allowance, the amount of income you can earn each year without paying tax. You also get a dividend allowance each year. You only pay tax on any dividend income above the dividend allowance. For tax year 2024/25 the dividend allowance is £500. This means if you have used up your personal allowance with other sources of income you can earn an additional £500 in dividends without paying any tax.

Financial Planning Idea:

Investing directly into equities or a fund which generates equity income will mean you can utilise your dividend allowance. You could also consider transferring shares to a spouse or civil partner if they have not used their own dividend allowance, to benefit from further tax relief. This is why we encourage households to plan their finances together. However, in some situations it is right for people to plan their finances independent of their spouse, each situation is unique.

What about capital gains tax?

The capital gains tax allowance in 2024/2025 is £3,000. This is the amount of profit you can make from an asset sale this tax year before any tax is payable. Investments held in a General Investment Account (GIA) will be subject to CGT only when you decide to sell them or transfer them to anyone other than your spouse or civil partner. There is currently no CGT payable on death.

Financial Planning Tips:

If you need to release capital for a specific purpose you could consider making use of your annual CGT allowance to do this without paying any tax. If you do need to release any capital from your savings your financial adviser will be able to determine the most tax efficient way for you to do this. You could also consider gifting assets to a spouse or civil partner, which is tax neutral, so they can also use their CGT exemption. Many clients also use their annual CGT allowance to take up their annual ISA allowance (£20,000). All income and capital gains from investments held in ISAs are tax free and do not need to be declared on your tax return. Claiming previous losses is also an option. If you have sold any assets and realised a loss, make sure you claim the loss on your tax return, as this can be offset against any gains above your allowance. If you do not claim the loss within four years the option will be lost.

Pensions Allowance

The annual allowance is the most that can be paid in to all your pension arrangements in a single tax year. For 2024/25 it is 100% of earned income up to a limit of £60,000. This may be lower if you have already accessed your pension pots, or you have a high income.

Pension Planning Suggestion:

Contributing into a family pension scheme is another option. Any UK resident can contribute up to £2,880 (net) into a pension, irrespective of their earnings, and obtain 20 per cent tax relief. This means the pension is credited with an extra £720 so that the gross contribution amounts to £3,600. You could consider contributing to a pension for a non-working spouse/civil partner or children to benefit from this.

A good tip from Lewis Baxter, Chartered Financial Planner in our London financial adviser office:

“A lot of people don’t realise that when it comes to pensions you can actually carry forward your unused allowances from the past three years. This provides people and business owners a great facility to save in a very tax efficient way. Of course it means you can’t touch that money until retirement, which depending on your situation could be a positive or negative thing. On a positive note you aren’t going to worry about the temptation of dipping into your savings so your money will stay invested for a long time which will have a great impact on its ability to grow. However, it is important clients understand their life objectives and don’t require that money for medium-term goals and that they have enough money saved away for emergencies and other events that life always throws at us. It really is about sitting down and discussing the timeline of things and making the most of the tax allowances that suit your unique situation.”

For pension planning tips why not check out our Ultimate Guide to Retirement Planning

Inheritance related tax allowances & gifting thresholds

It is never pleasant to talk about managing your money after death, but for many people, thinking about how Inheritance Tax (IHT) may impact their loved ones when they are gone is a reality of life. It is better for our mental wellbeing to plan for this in advance than have it as a worry in the back of our minds. By understanding more about gifting allowances you can ensure you protect those assets you intend to pass on.

IHT is arguably one of the more complex areas of tax. The current Nil Rate Band is £325,000 and there is an additional Residential Nil Rate Band of £175,000. This is frozen until 2028. At £325,000 and £175,000 it means a married couple are only likely to pay IHT if the estate is above £1m. If your estate is above this amount your financial adviser can discuss ways to mitigate any IHT payable on death, such as the use of trusts or life cover. Solicitors are quick to put trusts in to place, ofcourse this is how they earn their income, however life insurance can be a quick and easy alternative option and often sometimes cheaper, especially when it comes to wrapping a trust up.

Extra tips for inheritance, especially around gifting:

Not many people know that you can also make use of various IHT allowances each tax year. Gifts of up to £3,000 in total can be made each year without any IHT implications. If the £3,000 exemption was unused in the previous tax year, this can be carried forward so the maximum available exemption can be up to £6,000.

A married couple could gift up to £12,000 in a single tax year with no IHT implications. You could choose to gift this to people you care about, watching them enjoy their inheritance. Or you could consider investing for children or grandchildren into a JISA (Junior ISA) or a pension. As well as the tax benefits of doing this you should also discuss family linking with your adviser as it is possible to make further savings if your family are invested on the same platform. One of the many hidden benefits of working with a financial adviser is the cost of using investment platforms or taking out insurance products can be cheaper than going direct as a consumer.

Other exemptions are available. For example, small gifts of up to £250 per recipient and gifts in consideration of marriage of up to £5,000 by a parent. Regular gifts out of a surplus income are not subject to IHT, so being able to show a pattern of gifts can remove this from your estate immediately. To be accepted, you must be able to show you have maintained your standard of living after the gifts.

Advanced complex tax planning products

Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) are designed to encourage investments in smaller early stage companies. They are considered high risk but offer generous tax benefits. A few key points to note:

  • When it comes to Income tax relief you can claim up to 30% upfront income tax relief on the amount you invest, provided you keep your VCT shares for at least five years.
  • An EIS gives 30% tax relief on investments up to £2 million and capital gains (CGT) from other investments can be deferred.
  • These are specialist complex products which will not be suitable for all clients and are often suitable for experienced investors only.
  • Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS) invest in assets that are high risk and can be difficult to sell such as shares in unlisted companies.
  • The value of the investment and the income from it can fall as well as rise and investors may not get back what they originally invested, even taking into account the tax benefits.

Keen for more learning? Get stuck in to our money management podcast

Check out our video about tax efficient financial planning with Chartered Financial Planner Simon Jones. What is the difference between tax mitigation and tax evasion? How do we prepare for tax year end and how do we make the most of new tax year allowances. Here we answer all our questions on Tax and how this fits in with holistic financial planning.

 

Planning your finances around tax

When it comes to your tax, it can be difficult to know exactly how to best benefit and keep more of your money under your control and if the effort is worth the potential savings. Reducing your tax bill will provide a short-term increase to your income. Making use of tax-free gifts and ISA contributions means you can safeguard for the future, whether that be for yourself later down the road or for your nearest and dearest as part of a financial legacy.

It is also worth knowing where best to keep and save your money as this will help you make the best decisions in increasing your tax-free income. For example, keeping your savings in the bank could be detrimental to your finances, with inflation eroding any cash in your account over time. By spreading your savings out using ISAs and your gift allowances, you make the most of your tax allowances now which will help prepare you for years to come. Plus utilising things like tax allowances is a good part of an overall financial strategy and you will create good habits around your money going into the new tax year 2024/25.

Getting started with investments in the new tax year

You may want to consider investing your money in 2024 and beyond. There are a lot of misconceptions about investing, like you need a lot of extra cash to start making investments. This isn’t the case and some of our clients have regular contributions of around of a few hundred pounds a month, others put lump sum annual payments into their investments perhaps when they receive bonus and some clients put ad hoc savings away as and when they have built some cash up.

If you’re unsure where to start, are new to investing or perhaps you are unsure about the existing investments you have in place, Unividual can help. Our family-run business provides support for those planning their investments, with honest advice tailored to your unique lifestyle and specific to your situation, which ensures you only invest what you can afford.

There’s still some time to invest into this side of the tax year and utilise your 2024/25 tax allowances but it is swiftly running out. Managing your tax can be daunting at the best of times but our experts are here to provide you with all you need. For more information, get in touch.

Want to get your head around tax efficient investing? Get in touch

    Editor: Cherie-Anne Baxter

    Date: 02/02/2024

    Updated: 02/02/2024

    Approver: Quilter Financial Limited Awaiting

    Risk Warnings:

    The content and details of this article are as accurate as the day it was written or updated.

    The value of investments and the income they produce can fall as well as rise, you may get back less than you invested.

    Inheritance Tax Planning & Tax Planning are not regulated by the Financial Conduct Authority.

    Tax treatment varies according to individual circumstance and is subject to change.

    For ISA’s Investors do not pay any personal tax on income or gains but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA manager . Tax treatment varies according to individual circumstances and is subject to change.

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