Your Guide to End of Year Tax Planning
As we approach the end of the 2024/25 tax year, we’re presented with a window of opportunity to review your personal affairs and consider using any tax planning to utilise tax allowances before they are lost.
Income tax Every individual is entitled to a set of tax allowances in each tax year, including tax free personal allowance, dividends allowance and trading allowance. And it’s in your best interests to maximise your use of these to reduce your annual Income Tax liability. This year, the rates of Income Tax remain the same going into the new tax year and therefore taxpayers with an income of between £100,001 and £125,140 suffer an effective rate of 60% due to the loss of the personal allowance. Your personal allowance is tapered by £1 for every £2 that your income exceeds £100,000. If you then include the National Insurance Contributions (NIC) payable on this income, the effective rate increases will be 62%, with an additional rate of 2% applied for Class 1 NIC for employees and Class 4 NIC for those who are owners of unincorporated businesses. Therefore, it’s important to consider ways in which you can reduce your taxable income and mitigate your annual tax bill.
How to optimise your tax position
There is a limit to the amount you can invest into your pension fund in each tax year, known as the pension annual allowance. Currently an individual can contribute £60,000 within the year into their pension without incurring an income tax charge. This includes contributions into an Occupational Pension Scheme and a Self-Invested Personal Pension. You can also utilise any unused pension annual allowances from the previous three tax years (2021/22 onwards) for 2024/25. However, this annual tax-free pension allowance will be reduced if the sum of your taxable income and employers pension contributions exceeds £240,000. So, it’s important to review your pension annual allowance for the year to make sure you don’t exceed your annual allowance and suffer a tax charge. ISA allowances The 2024/25 ISA savings limit remains at £20,000 for individuals and £40,000 for married couples. These limits apply per tax year and cannot be carried forward. If you have not utilised your ISA savings limit for the 2024/25 tax year, then you should consider whether you can optimise your investments by taking advantage of the tax-free wrapper available. Unused allowances are not carried forward to future tax years so it’s a case of use it or lose it.
Pension contributions Both an effective way to avoid the higher rates of income tax and to positively impact your long-term financial position. A contribution to your pension will attract a 20% top-up payment from HM Revenue and Customs within the pension scheme, whilst your Income Tax bands increase by the gross contribution. This can be a very effective way to reduce the impact of the effective 60% tax rate.
As an example
Mark receives an annual taxable income of £110,000 and is therefore paying an effective rate of tax of 60% on £10,000 of his income. If Mark made a gross contribution of £10,000 to his pension fund, the point at which his personal allowance is tapered would be increased to £110,000 and he would therefore not be subject to 60% tax. To make a gross contribution of £10,000 Mark would need to actually pay £8,000 into his pension (basic rate tax would then be reclaimed by the pension), Mark would save tax personally of £4,000 and the cost to Mark is therefore £4,000 whilst increasing his pension pot by £10,000.
4 | SCRUTTON BLAND | PRIVATE CLIENT
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