Tax year planning for 2024/25
It is always a good idea to review tax planning opportunities to ensure allowances are maximised and your planning is in line with current legislation, particularly this year given various changes now coming into force. Our guide is a brief reminder of the key points to be addressed when tax year planning for 2024/25.
Points to remember when tax year planning for 2024/25
Pensions
Abolition of the Lifetime Allowance:
- The Lifetime Allowance was abolished with effect from 6 April 2024. Instead, new rules will limit tax-free lump sums payable both in lifetime and on death. Only lump sum payments will be tested whereas income payments can be made without restriction (but are generally subject to income tax).
- The standard lump sum allowance (LSA) is set at £268,275 and limits the tax-free payments from pensions during the member’s lifetime.
- The standard lump sum and death benefit allowance (LSDBA) is set at £1,073,100 and limits the tax-free payments both in life and on death.
- Those with lifetime allowance protections will generally have both a higher LSA and a higher LSDBA. Where benefits have been taken under the lifetime allowance regime there are complex transitional arrangements and advice is necessary.
- The annual allowance for tax relievable contributions, subject to earnings for personal contributions, remains at £60,000. The relief is available at your highest marginal rate of Income Tax.
- The adjusted income limit is £260,000, at which point your annual allowance starts to reduce on a £2 for £1 basis, down to a minimum of £10,000 if your adjusted income exceeds £360,000 (and your threshold income exceeds £200,000).
- Employer pension contributions are a tax efficient way of extracting profits for owner-managers and should be deductible for corporation tax purposes. This offers owner-managers a tax efficient deferred income.
- Employers should consider offering their employees salary sacrifice arrangements for employer sponsored pension arrangements, which is provided at no extra cost to the employer (subject to possible admin fees).
- It may be possible to carry forward unused annual allowances from the previous three tax years if the current year’s allowance has been used up. If your income is over £100,000, a pension contribution may also help to reclaim any “lost” personal allowance, potentially resulting in effective tax relief of up to 60% on your contribution.
- Consider making a net contribution of up to £2,880 (£3,600 gross) for family members including those with no earnings, e.g. children.
ISAs
Have you used your ISA allowance of £20,000?
- The ISA allowance remains unchanged at £20,000, which means a couple have a total allowance of £40,000 this tax year.
- Any income or growth that is generated within the ISA is received tax free, and withdrawals are not subject to tax.
- You can save your full allowance into a stocks and shares ISA, a cash ISA, or combination of the two.
- Up to £9,000 can be contributed to a Junior ISA or Child Trust Fund.
In the March 2024 Budget, the Government announced a consultation on plans to introduce a new UK ISA with the aim of channelling more investment into UK Equities. The proposed ISA will have a subscription limit of £5,000, which will be in addition to the current standard ISA subscription limit of £20,000.
Dividend allowance
The amount of dividends you can receive without paying Income Tax has reduced to £500 with effect 6 April 2024. This needs to be considered if you have any control on dividends you receive.
Income Tax
When tax year planning for 2024/25, you can split income generating assets between couples to maximise the use of both individual’s personal allowances.
Inheritance Tax
Make the most of Inheritance Tax (IHT) allowances:
- The tax-exempt nil rate band remains frozen at £325,000 until April 2028.
- You can gift up to £3,000 each tax year, or £6,000 if there was no gift in the previous tax year. Any unused allowance from the previous year can be carried forward, meaning a couple can between them potentially make a tax-free gift of up to £12,000.
- On a child’s marriage, parents can gift £5,000 each (grandparents £2,500 each).
- You can make as many gifts as you wish of up to £250 per person, per tax year.
- Gifts as part of your normal expenditure are exempt from an IHT charge. A pattern of making these payments should be established and documented. You may be able to look back at previous years to increase the amount available.
- Homeowners may benefit from the Residence Nil Rate Band (RNRB) of £175,000 which can be used in addition to the standard IHT nil rate band. To benefit, your home must be passed down to direct descendants, i.e. children/ grandchildren. There is a tapered withdrawal of this allowance for inheritance estates with a net value of more than £2 million. This is at rate of £1 for every £2 over £2 million. This is beneficial to married couples and those in civil partnerships as their IHT relief is doubled. RNRB can be transferred to the deceased’s spouse or civil partner’s estate. On first death, the unused RNRB is capped at the value of the home. This can even be done if the first of the couple died before 6 April 2017.
- If you leave at least 10% of your net estate to charity, your estate could pay the reduced rate of IHT of 36% on assets above £325,000, instead of the standard 40%.
- You can also mitigate any potential IHT liabilities by implementing simple life assurance policies written under suitable trusts.
Have you reviewed your Will in the last 5 years?
Review your Will to ensure it meets your current wishes and you are maximising IHT reliefs.
Capital Gains Tax
- UK resident individuals are entitled to realise capital gains of up to £3,000 (2024/25) without having to pay any Capital Gains Tax (CGT). This is a reduction compared to the £6,000 entitlement in 2023/24 – and significantly lower than the £12,300 allowance many have become accustomed to.
- The ownership of any asset may be transferred to or shared with a spouse/civil partner without triggering a tax charge, so that both annual exemptions may be used.
- The 2024/25 CGT rates are 10% for individuals who have not used their entire basic rate tax band against their income and 20% for higher or additional rate taxpayer.
- The CGT rate for transactions involving residential property (other than your principal residence), or carried interest, remain at 18% at the lower rate and a now reduced rate of 24% (down from 28%) for the higher income tax rate payers.
- If you have an unused ISA allowance, it may be beneficial to use your CGT allowance to crystallise funds held in a non-tax-privileged investment account and reinvest it in an ISA.
EIS investment
Have you considered an Enterprise Investment Scheme (EIS), which offers Income Tax relief of 30% and unlimited capital gains tax deferral?
- Up to £1,000,000 can be invested with a 30% Income Tax reduction being given on the amount invested or your income tax bill if less.
- This limit is doubled to £2,000,000 provided any amount over £1 million is invested in “Knowledge Intensive Companies”.
- An EIS must be held for at least three years to retain the tax relief. The full allowance of EIS relief in the year could equate up to a £600,000 reduction in your income tax bill.
SEIS investment
Have you considered investing into a Seed Enterprise Investment Scheme (SEIS), which offers 50% Income Tax relief and a CGT exemption?
- Up to £200,000 can be invested annually. The relief provides a 50% Income Tax relief and the ability to exempt capital gains equal to 50% of the amount invested.
VCT investment
Have you considered Venture Capital Trust (VCT), which offers 30% Income Tax relief available on £200,000?
- Up to £200,000 can be invested and up to 30% Income Tax relief is available with future dividends exempt from income tax. It is recommended that you hold the VCT for at least five years.
If you have any questions regarding tax year planning for 2024/25, please contact our specialists.