January 17, 2025
If you haven’t evaluated your personal tax situation recently, there is still time to do so before the tax year end on 5th April.
It’s important to review your savings and investments regularly, and approaching the end of the tax year is an ideal time to check for tax efficiency too. Regular reviews give you an opportunity to make sure you are up-to-date with any changes in the law, and to make the most of the various allowances and reliefs available to enhance your tax efficiency and make your money work harder for you and your family.
Understanding your tax affairs is key to maximising your wealth and setting you up for a secure financial future.
If you’d prefer to be guided around the UK tax system, an experienced independent financial adviser (IFA), who will help you to navigate it, and advise you on what actions you could take.
The tax landscape changes frequently, so it’s wise to keep up-to-date. As we near the end of the 2024/25 tax year, make sure you know how your income is taxed, and whether you can benefit from the multitude of potential reliefs and allowances.
This allowance provides an opportunity for couples where one partner is a basic rate taxpayer and the other partner’s income falls below the personal allowance of £12,570. With the Marriage Allowance, you can transfer up to £1,260, which equates to 10% of the personal allowance, from the lower-income partner to the higher-income partner. This transfer can save up to £252 in the current tax year. This allowance is available to married couples and registered civil partners.
If you are employed, there are several tax reliefs you may be eligible to claim, designed to compensate for certain expenses you might incur in your job.
One of these is for professional subscriptions. If you need to maintain membership of a professional body, you can claim tax relief on these fees.
Another is the ‘working from home’ allowance. This is aimed at employees who incur additional costs due to working from home, such as maintaining a home office.
You may also be entitled to claim relief for business miles travelled in your personal vehicle. If you use your own car for work-related travel, this relief can help with fuel and other running costs.
These allowances are aimed at individuals who earn small amounts of income from activities like selling items on eBay or Amazon, or renting out spaces on Airbnb. Each of these allowances offers up to £1,000 of tax-free income.
Also, if you rent out a portion of your home, you may be eligible for the Rent-a-Room relief. This relief allows you to receive up to £7,500 tax-free from letting out a room in your home.
In the current tax year, the annual ISA allowance remains at £20,000. The total contribution can be split across different types of ISAs (such as Cash or Stocks & Shares) but please note that different allowances apply to Lifetime ISAs and Junior ISAs – see below.
Income and gains realised in an ISA are not subject to tax. That means no income tax and no capital gains tax (CGT).
If you own shares and have yet to use your full ISA allowance for this tax year, you might want to consider a more tax efficient approach. The dividend allowance is now only £500 having been ten times that amount as recently as 2017/18. The annual exempt amount for CGT has also been cut from £12,300 in 2022/23 to just £3,000 now.
Children are entitled to a Junior ISA (JISA) allowance of £9,000 per annum. In addition to your own ISA, if you have additional money to invest you could consider funding a JISA to provide your children with a nest egg when they turn 18.
A Lifetime ISA (LISA) is primarily aimed at individuals aged 18 to 40 who are planning to purchase their first home. Contributions are capped at £4,000 annually, and the government bolsters your efforts with a 25% bonus (up to a maximum of £1,000 per year). If the money isn’t used to buy your first property, it can be accessed from age 60 to supplement your retirement income.
Pension contributions should be a key consideration at the end of each tax year. Contributions to pension schemes can also be made on behalf of your minor and adult children and your grandchildren.
There are several advantages to putting money into a pension apart from funding your retirement. The main tax benefit is that your contributions attract income tax relief at standard rates. In other words, whether you pay income tax at 20%, 40% or 45% you can expect to receive that level of tax relief. Basic rate relief is given inside the pension scheme. Higher and additional rates are dealt with through your Self Assessment tax return.
Employer contributions will usually attract corporation tax relief so if you run your own company, you really ought to review your pension provision with your accountant and/or IFA every year.
‘Carry forward’ rules
The ‘carry forward’ rules allow you to carry forward unused allowances from the previous three tax years, if eligible. As we reach this tax year end, you’ll lose any unused allowance for the 2021/22 tax year. This is a highly complex subject so you should definitely speak to an accountant and/or IFA to get a clear idea of your specific situation.
As noted above, the annual exempt amount has been cut dramatically in recent years and is currently only £3,000. There was also a change in the rate of CGT charged that took effect immediately after the Budget on 30th October 2024. If you have already realised gains in 2024/25, or expect to do so before 6th April, we strongly recommend speaking to an expert!
If you receive dividends from your investments, or your own company, you can expect to pay tax on any amounts above £500 in 2024/25. Dividends are typically taxed at lower rates than other types of income so this might still be a suitable approach for you. But as we said at the start of this article, it can make good sense to review your arrangements every year regardless.
Gifting for estate planning
Certain gifts can be exempt from Inheritance Tax, and therefore immediately outside of your estate, rather than subject to the well known ‘seven year rule’. These are commonly referred to as exempt gifts of which there are four types:
The ‘annual exemption’ remains at £3,000 per tax year, allowing you to gift cash or property up to that value with no IHT consequences. This can be given to a single individual, or divided among several recipients. If the previous year’s exemption wasn’t utilised, it can be carried forward to the current tax year, effectively doubling the exemption to £6,000.
The ‘small gift allowance’ means you can give up to £250 per tax year to as many different people as you like, as long as you haven’t used other exemptions for the same person.
Gifts on the occasion of marriage have their own special exemption depending on your relationship to the bride and groom. You can give up to £5,000 to your own child, up to £2,500 to a grandchild, and up to £1,000 to anyone else.
Finally, regular payments could be treated as ‘normal expenditure out of income’ subject to certain requirements being met.
In addition to these general exemptions and allowances, a contribution to charity or a political party is also exempt.
Other available allowances
Your Personal Savings Allowance (PSA) relates to interest earned on cash deposits and is currently set at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers are not entitled to this allowance.
Understanding the exemptions and allowances that might suit your circumstances can mean you keep more of your income and capital gains, and potentially reduce the amount of Inheritance Tax levied on your estate.
If you’d like the help of an experienced IFA to review your tax position in time for the end of the 2024/25 tax year, you can find a Talis IFA here.
This article does not constitute tax or legal advice and should not be relied upon as such. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. For guidance, seek professional advice. A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
site by motley.co.uk