With just over a month to the end of the tax year, we consider actions individuals should contemplate now to optimise their tax position and use up their tax allowances for 2024/25 and look at some key changes to plan for from April 2025.
Year-end Tax Planning
PRESERVING YOUR PERSONAL ALLOWANCE
Income between £100,000 and £125,140 is taxed at a very unpalatable 60% marginal tax rate due to the impact of the loss of the personal allowance once income exceeds £100,000. Taxable income can be reduced through pension contributions (subject to restrictions set out below) and charitable donations.
As an example, if your income in 2024/25 is expected to be £105,000, making a personal pension contribution of £4,000 would restore your personal allowance in full, thereby reducing your tax liability by £2,000, and would increase your pension fund by £5,000 (including the tax relief).
SPOUSES
Where your spouse or civil partner has lower income levels, such that their personal allowance and/or basic rate band is not being utilised, it can be sensible to gift income producing assets to them to utilise these lower tax bands and hence increase income tax efficiencies across the family unit.
There is no capital gains tax (CGT) or inheritance tax (IHT) on transfers between spouses, so an income generating asset can often be transferred to the lower taxpayer without triggering a tax charge.
DIVIDEND ALLOWANCES
The first £500 of dividends received in 2024/25 is tax free. If you are in a position to control dividends received, then it is worthwhile ensuring this allowance is utilised.
REALISING CAPITAL GAINS/CONSIDERING YOUR LOSS POSITION
Make use of your annual CGT exemption of £3,000. As previously outlined, there is no CGT between spouses and transferring all or part of an asset to a spouse before sale may allow the family to take advantage of their annual exemption if not already utilised.
Capital losses must be claimed within four years of the end of the tax year in which the loss is realised. Capital losses realised in 2020/21 must therefore be claimed by 5 April 2025. If not previously claimed in your tax return, consider whether there is an opportunity to log the losses with HMRC before the end of the tax year. In addition, it may be possible to claim a capital loss if you hold assets or investments which have fallen in value and are now worthless. In certain circumstances where a capital loss relates to shares in an unquoted trading company, it may be possible to offset the loss against income. There are various conditions to this and if relevant you should speak to your usual RG contact.
Consider any assets qualifying for business asset disposal relief (BADR) or investors’ relief (IR), the rates for which are increasing from 6 April 2025 from 10% to 14%.
PENSION CONTRIBUTIONS
Making contributions to pension funds can often create tax savings for higher and additional rate taxpayers.
The amount of tax-deductible pension savings that can be made for each individual is limited to the “annual allowance”. The standard annual allowance is £60,000 which is reduced by £1 for every additional £2 of income above £260,000 subject to a minimum allowance of £10,000.
Where pension savings for the last three years have been lower than the annual allowance for the relevant year, there may be scope for catching up on pension savings in the current year. You should review the position with your usual RG contact and take financial advice from a FCA regulated pensions adviser before making any contributions.
Whilst pension contributions are limited to an individual’s relevant earnings, any UK resident individual under the age of 75 can contribute up to £2,880 (net) into a stakeholder pension each year, irrespective of their earnings or whether or not they are employed, so these pensions can be funded for non-working spouses and children. The pension provider will reclaim 20% tax relief direct from HMRC, so the policy will be credited with a gross contribution of £3,600.
Employer pension contributions are a tax efficient way of extracting profits for owner-managers and should be deductible for corporation tax purposes provided the overall remuneration package for the individual is set at no more than commercial levels. This offers owner-managers a tax-efficient deferred income.
IHT EXEMPTIONS/ ALLOWANCES
The IHT annual exemption is £3,000 and small gifts of £250 can also be made (to different recipients). If all or part of the previous tax year’s (2023/24) £3,000 annual exemption was unused the remainder can be carried forward and used in 2024/25.
As an example, take an individual with three adult children and six grandchildren, who wishes to reduce their inheritance tax exposure.
The individual and their spouse could each gift £1,000, annually, to each of their three children and £250 to each of their six grandchildren. Over ten years the couple’s combined estate will reduce by £90,000, saving IHT at 40%, being £36,000.
ISA ALLOWANCE
The annual overall subscription limit for an ISA for 2024/25 remains at £20,000, which can be invested in cash, UK stocks and shares, foreign shares, corporate bonds and other permitted investments. ISAs are available to UK resident individuals aged 18 or over (age 16 or over for cash ISAs for subscriptions before 6 April 2024). The investment return from ISAs is free from income tax and CGT.
If you hold more than one type of ISA, such as a Cash ISA and a Stocks and Shares ISA, you can spread your ISA allowance between them.
Junior ISAs are available to children under the age of 18 who are UK resident and who do not have a child trust fund. The annual subscription limit in 2024/25 is £9,000, which can be split between stocks and shares and cash. The funds are locked in until the child is 18, when the account will default to a normal ISA if the funds are not withdrawn.
Ordinarily, when a parent gives money to a child, if the income arising from the gift exceeds £100, the whole of the income is taxable on the parent (while the child is under 18). This provision does not apply to a Junior ISA.
TAX EFFICIENT INVESTMENTS
The Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs) provide opportunities for tax savings.
EIS, SEIS and VCT investments all have annual limits, as follows:
- EIS – £1,000,000 with income tax relief of 30%, or up to £2,000,000 provided the additional £1,000,000 is invested in ‘knowledge-intensive’ companies.
- SEIS – £200,000 with income tax relief of 50%.
- VCT – £200,000 with income tax relief of 30%.
Any gains realised on disposal of EIS, SEIS or VCT shares may be exempt from CGT. In addition, gains made on disposal of other assets may be deferred if EIS investments are made, or partially exempted if SEIS investments are made.
The EIS, SEIS and VCT tax rules are complicated, and it is important to take professional advice. Regulated financial advice may also be required.
April 2025 changes
NATIONAL INSURANCE CONTRIBUTIONS – SHOULD VOLUNTARY CONTRIBUTIONS BE PAID?
Voluntary contributions may be paid to make up a shortfall in an individual’s National Insurance record. Before paying voluntary contributions, it is necessary to ascertain whether the payment of such contributions would be worthwhile. You can check your record at at www.gov.uk/check-state-pension.
If you already have 35 qualifying years (or will do by the time state pension age is reached), there is no benefit in paying voluntary contributions. However, if you have less than 35 years, it may be worthwhile making voluntary payments to increase your state pension. Likewise, if by state pension age you will have some qualifying years but less than 10, it may be worthwhile paying sufficient voluntary contributions to secure a minimum pension.
For men born on or after 6 April 1951 and women born on or after 6 April 1953 the deadline for making payments to fill in gaps in your National Insurance record between 6 April 2006 and 5 April 2018 has been extended to 5 April 2025. After this date you will only be able to make payments for the previous six tax years.
SALARY SACRIFICE
Where an employee gives up salary in exchange for a non-cash benefit (commonly a zero-emissions car, or pension contributions), this arrangement leads to a NIC saving for the employer because they do not pay NICs on the pre-tax salary sacrificed by the employee. With employer’s National Insurance increasing from 13.8% to 15% from 6 April 2025, salary sacrificing could lead to greater savings and could help to offset the increase in NIC.
NON-DOMICILED INDIVIDUALS
From 6 April 2025, extensive reforms will replace the current tax regime for UK resident, non-UK domiciled individuals (‘non-doms’). These are sweeping reforms and will significantly impact the tax position of both non-doms and UK domiciled individuals who have spent time outside the UK.
Please get in touch with your usual RG adviser if this may impact you and you wish to discuss further.
FURNISHED HOLIDAY LETS
Until 6 April 2025, a furnished holiday let (FHL) benefits from various tax reliefs not available to other rental property businesses. These include:
- Various capital gains tax and inheritance tax reliefs (subject to conditions)
- Being able to vary the split of income from a jointly owned FHL
- FHL profits treated as earned income for pension contribution purposes
- Capital allowances can be claimed
- Full relief for finance costs
From 6 April 2025, the special rules for FHLs are being abolished and FHLs will be treated like other rental property businesses. There are many considerations including:
- If you are thinking about selling your FHL, doing so before 6 April 2025 could allow you to claim Business Asset Disposal Relief, which could mean you pay tax at 10% rather than 24%
- With a jointly owned property, not making an election will mean the income is automatically taxed 50/50. You should check whether you would benefit from making an election to split the profit based on actual ownership split rather than the default 50/50
- Consider maximising your capital allowance claim before the rules change
- Check your pension position if your contributions rely on the “earned” FHL income
- Consider your mortgage or funding position.
DOUBLE CAB PICK-UPS
Historically, most double cab pick-ups have been treated as vans for tax purposes and have benefitted from favourable tax treatment. From April 2025, most (if not all) double cab pick-ups will be treated as cars, which will mean an increase in benefit in kind tax charges and Class 1A NIC, and reduced capital allowances.
There are transitional arrangements to help individuals, and other issues to be aware of, therefore if you are thinking of changing your vehicle(s), please get in touch with your usual RG adviser.
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