May 13, 2024
Several changes announced in 2023 will start to take effect this year. If your annual income is above £100,000, it’s also worth being aware of some differences which took effect in 2023/24, as you may be closer to the 45% income tax threshold than you think.
If you’re not sure whether you are likely to be affected, now would be a good time to take stock, and see whether there will be an impact on your tax obligations.
Understanding changes as early as possible allows you to plan in advance and make adjustments to take any increases in your tax obligations sooner rather than later – helping to minimise any impact on your finances and avoiding unwelcome surprises later on.
At Talis IFA, we recognise that not everyone keeps their eye on the tax landscape, so we’ve put together a plain-English summary to help you.
If you are a higher-rate taxpayer and it looks as though the changes may increase your tax liabilities, you certainly don’t need to panic! By talking to an IFA, you may find ways to lessen the impact, and the sooner we can take a look, the more likely we are to be able to help.
Could you be paying tax at 60%?
The 45% additional rate of income tax applies when income exceeds £125,140 – a reduction from £150,000 that took effect from 6th April 2023. And it remains the case that earning over £100,000 means a reduction in your personal allowance; instead of the full £12,570 it could be tapered to zero. You might be surprised to learn that income between £100k and £125k is therefore being taxed at a rate of 60%.
If your income has increased this year, it could be time to look at how this might affect you, and explore ways to mitigate the impact on your earnings.
Reduced Capital Gains Tax (CGT) and dividend allowances
The annual amount which is exempt from CGT dropped from £12,300 to £6,000 in the tax year ending April 2024, and from 6th April 2024, it dropped further to £3,000.
Similarly, there has been a further drop in the tax-free dividend allowance, which fell from £2,000 to £1,000 in the 2023/24 tax year, and in the current tax year (24/25) has been further reduced to just £500.
How can you mitigate changes in your tax liabilities?
At first glance, you might be concerned about your tax bill increasing this year. And you might be right, but there are ways in which it may be possible for you to reduce your tax bill by adjusting your financial strategy.
The first thing to do is to talk to your IFA, and arrange to review your financial strategy. They’ll look with you at your complete financial picture, and then suggest options for you. Any recommendations will be based on your individual circumstances and objectives, but some of the options we’ll look at could include:
The limit for contributions in any one tax year whilst still benefiting from tax relief currently stands at £60,000. So if your income level and current contributions allow you to increase how much you are paying into your pension, that may be one place to start. As well as reducing your tax bill now, this will add to your pension pot on retirement.
How you receive any tax relief on your pension contributions depends on whether you are employed or self-employed, and it’s important to talk to your IFA before making any changes, to ensure this is the right strategy for you.
If you have a non-earning spouse or partner who isn’t using their tax-free allowances, you may be able to gift some of your investments to them to ensure these allowances aren’t wasted. Investment splitting allows you to make use of both lower income tax bands and CGT allowances.
You don’t have to pay CGT on land, property or shares donated to charity, and by deducting the value of your donation from your total taxable income, you can also reduce your Income Tax liability. If you plan to make donations in the future, it may be worth looking at this as an option now.
If you are a company owner, you may want to look at restructuring dividends in view of the reduction in tax-free allowances.
As a longer-term strategy, talk to your IFA about family investment companies, as dividends received by a company aren’t subject to tax.
With the CGT exempt allowance having decreased to £3,000 from April 2024, if you plan to sell any shares in this tax year, review with your IFA before taking action, particularly if you are also selling any property or other assets that attract CGT, to avoid any unpleasant surprises later.
Offshore investment bonds can provide cash in the form of capital payments, deferring tax on growth. The flip side of this is that the growth becomes subject to Income Tax rather than CGT when the bond matures, so, together with your IFA you will need to look carefully at the pros and cons to understand whether this is an appropriate option for you.
Understanding your tax position as early as possible in the tax year can help you to plan better and make the most of the options available to you. Careful planning and professional advice can help you to minimise your tax liabilities and avoid the stress of unpleasant surprises later on.
If you’d like the help of an experienced IFA to review your tax position now, or to take a more detailed look at your financial planning for the future, get in touch.
site by motley.co.uk