2024/25 UK tax year end planning

Where available, UK taxpayers are entitled to a tax-free personal allowance of £12,570 for 2023/24, with the next £37,700 being taxed at 20% (the basic rate). Income between £50,271 and £125,140 (reduced from £150,000 in 2022/23) is taxed at 40% (the higher rate) and anything over £125,140 is taxed at 45% (the additional rate). There are different rates of tax for Scottish taxpayers. 

There are different rates for dividends applicable to these Income Tax bands of 8.75%, 33.75% and 39.35% respectively. However, the first £1,000 of dividends received are not subject to tax for all taxpayers regardless of their income levels, under the dividend allowance. This tax-free allowance will be reduced to £500 for 2024/25. 

The Personal Savings Allowance (PSA) is available to basic and higher rate taxpayers. If you’re paying tax at 20%, the PSA is £1,000 per annum and this is reduced to £500 per annum for higher rate taxpayers (additional rate taxpayers are not entitled to a PSA). If you have material savings, which is certainly more common with the current higher level of interest rates, you should therefore track your savings income and consider the use of an Individual Savings Account (ISA) (see the ‘Tax-efficient investments’ section below) or other tax-free investments. 

The personal allowance is phased out on income between £100,000 and £125,140, effectively creating a marginal tax rate of 60% (plus 2% National Insurance, if applicable) on income within this bracket. This can be reduced through the use of Gift Aid donations and pension contributions.

What should you do?

Ensure that there is sufficient income generated, where possible, to make best use of your personal allowances and basic rate bands. As the personal allowance and tax bands will be frozen for a further four years (i.e. until 5 April 2028), it’s more important than ever not to waste them. To do this, you could consider the timing of dividends, trust distributions and pension withdrawals. In addition, income-producing assets can be transferred between spouses without any liability to Capital Gains Tax to ensure that both spouses are utilising their lower rates of tax and tax-free allowances.

Where your income is in the £100,000 to £125,140 bracket, consider the possibility of additional Gift Aid donations or pension contributions.

If you make a charitable cash donation within the scope of a Gift Aid election, you can obtain Income Tax relief at your marginal rate on the grossed-up amount of the gift. This covers UK registered charities and certain charitable organisations within the European Economic Area (EEA). Correspondingly, the charity can reclaim the tax equivalent of 25% of the cash gift. 

For example, if you’re a higher rate taxpayer (40%) and you donate £100 to charity, your basic rate band is extended by £125. Provided you pay at least £25 of tax, the charity reclaims £25 (20% of £125) from HMRC. You would also benefit by £25, by virtue of paying tax at 20% instead of 40% on the income matched to the grossed-up donation of £125.

If you’re an additional rate taxpayer (whose marginal rate is 45%), you would get enhanced relief of £31.25, (i.e. 25% of £125 in the above scenario). The rates of relief associated with charitable donations differ where Income Tax relief is given in respect of dividend income (as this is subject to different rates of tax, as set out above). 

You can donate assets other than cash to charity, such as qualifying land or shares. In this case, the market value of the land or shares donated to charity is deductible from your general income, providing relief at your marginal tax rate (up to 45%).

What should you do?

Consider whether you wish to make any further charitable donations in 2023/24 before the end of the tax year. As mentioned above, this may assist with reducing the amount of your taxable income subject to marginal rates of 40%, 45% or 60%. If you’re planning on making large charitable donations, consider whether it would be beneficial to do so in the current tax year or to wait until the start of 2024/25. This may be particularly relevant if, for example, you are considering making larger donations of land and shares and would benefit from a higher rate of tax relief in 2024/25. You should also bear in mind that you need to have paid enough Income Tax and Capital Gains Tax to frank the 25% claimed back by charities using Gift Aid, or else your tax liability increases to match that amount.

When you contribute to a personal pension (other than via salary sacrifice), you can be eligible for tax relief at your marginal rate. As with donations made under Gift Aid, your basic and higher rate tax bands are extended by the grossed-up pension contribution so that you obtain tax relief at your marginal rate. Relief is limited by the lower of your relevant earnings and the annual allowance. Pension contributions in excess of the annual allowance are subject to the annual allowance charge, which effectively claws back the marginal rate tax relief. 

Changes to the standard annual allowance for gross pension contributions, annual allowance tapering and more were announced in the 2023 Spring Budget announcement. As there have been several changes to these rules, we would recommend you seek advice tailored to your circumstances. 

What should you do?

Consider whether you wish to make any further pension contributions in 2023/24, in particular and where appropriate, ensuring that you do not lose allowances from previous years. In 2023/24, unused allowances from 2020/21 to 2022/23 can be utilised and any unused allowance for 2020/21 will be lost if it is not utilised before 5 April 2024.

There are a number of tax-efficient investments you may wish to consider in order to reduce your tax liability.

Individual Savings Account (ISA)

An Individual Savings Account (ISA) is available to all UK resident individuals aged 18 or over. The annual overall subscription limit for an ISA for 2023/24 remains at £20,000 with no provision to carry-forward unused allowances into later years. 

ISAs can be invested in cash or certain investments such as stocks and shares. There are also Junior ISAs available for those under 18 with an annual limit of £9,000. The main benefit of ISAs is that Income Tax and Capital Gains Tax (CGT) do not apply and additionally when an ISA is inherited from your spouse or civil partner on their death, it can continue to qualify as an ISA.

Those wishing to invest in higher risk start-up companies may also consider the following investment vehicles:

Enterprise Investment Scheme (EIS)

It’s possible to invest up to £2million in EIS, provided anything over £1million is invested in ‘knowledge-intensive’ companies. These are companies that carried out research, development or innovation at the time they issued, or are issuing shares. You receive an Income Tax deduction of up to 30% of the EIS investment and the subsequent disposal of your EIS shares is potentially exempt from CGT, subject to various conditions being met. You also have the option to defer capital gains on assets disposed of three years before or up to one year after your EIS investment, equal to the amount invested. 

Seed Enterprise Investment Scheme (SEIS)

You can invest up to £100,000 in the year and receive an Income Tax reduction of 50% of the investment, potentially wiping £50,000 off your Income Tax bill, and the subsequent disposal of your SEIS shares is potentially exempt from CGT, subject to various conditions being met. Furthermore, you can claim to exempt 50% of a capital gain from CGT in the year if you reinvest the amount of the gain in a SEIS investment (i.e. a gain of up to £50,000). Provided the various individual and company conditions are met within the three years following an investment, the gain remains exempt from CGT.

Venture Capital Trust (VCT)

A VCT might be suitable for you if you are prepared to invest in higher risk funds. You can invest up to £200,000 in a year and receive an Income Tax reduction of 30% of the investment. The subsequent disposal of your VCT units is potentially exempt from CGT, subject to various conditions being met. However, unlike EIS or SEIS, there is no scope to carry back the subscription to the previous tax year but, on the other hand, VCT dividends are exempt from Income Tax. 

What should you do?

Consider maximising your ISA allowance for the year if you have not already done so.

If you are interested in making investments in EIS, SEIS and VCTs, consider whether one prior to 5 April 2024 would be appropriate. It’s also possible to carry back any EIS/SEIS subscriptions made in the current tax year to 2022/23, providing the EIS/SEIS limit has not been exceeded in that year. As the 2022/23 Self-Assessment filing and payment deadline has now passed, this should generate a tax repayment.

If you’re in a position to consider deferring capital gains on assets disposed of, you may wish to consider whether a deferral would be appropriate now. When a deferred gain recrystallises, it is subject to the rate of CGT at that time and so there is a risk that a higher CGT rate could apply in a future tax year.

Start-up companies are notoriously high-risk investments and so there are more than just the tax implications to consider. 

Where available, you are entitled to a tax-free annual exemption of £6,000 for 2023/24 in respect of capital gains realised in the year. The annual exemption will be reduced to £3,000 for 2024/25.

Gains in excess of the annual exemption (and not relieved by same year or brought forward losses) are then charged to tax at 10% for any remaining basic-rate income band entitlement, with 20% charged on any remaining gains. The basic and higher rates of CGT rise to 18% and 28% for disposals of residential property and carried interest.

There are also several important CGT reliefs to consider, such as:

Business Asset Disposal Relief (BADR). This was previously known as Entrepreneurs’ Relief and applies a CGT rate of 10% to gains realised on sales of trading businesses and shares in a trading company, subject to certain conditions. This relief is subject to a lifetime limit of £1million of qualifying gains (i.e. a maximum saving of £100,000). 

Principal Private Residence (PPR) relief. This is also available on any gain on the sale of your main residence, which exempts the gain for the period that the property is your main residence (as well as certain other periods). In many cases, it is straightforward to determine which property is your main residence, although it is possible to nominate a property if you have more than one residence at a given time.

The CGT rates are historically low and, while speculation about a rise in the rate has been present in the last couple of years, an uplift in the rate of CGT cannot be ruled out. Any increase in the rate of CGT could be implemented from the date of the Budget (6 March 2024), as opposed to the start of the current financial year (6 April 2023). 

It is worth noting that many UK residential property disposals must now be reported to HMRC within 60 days of the completion of the sale. Certain exemptions from this accelerated filing requirement apply but advice should be sought as HMRC can impose late filing and payment penalties and interest.  

What should you do?

If possible, consider whether enough gains can be crystallised each year to utilise the annual exemption available. Also consider whether capital losses can be generated before 6 April 2024 if large gains have already been realised, or whether you have any brought forward losses from previous years available. This may include negligible value claims against worthless assets, where these have not already been realised. It could also involve transfers between spouses before sale, to ensure that any losses are set against other gains. However, this may not always be appropriate, such as if you anticipate large gains in future years.

Likewise, if you are planning on making disposals that will crystallise large gains and the circumstances make this possible or advisable, it may be worth making them in this tax year rather than waiting for future tax years where the CGT rates may be higher.

If you have not done so already, you may also wish to review your Business Asset Disposal Relief position, particularly in the light of reductions in the lifetime limit, the most recent being in 2020. These rules have cumulatively changed in recent years and further changes cannot be ruled out. 

Finally, if you have more than one home, consider your Private Residence Relief position and whether an election is needed. The availability of PPR relief can also be complicated, where the garden or grounds of a property exceed 0.5 hectares (c.1.2 acres), and this is an increasing area of HMRC enquiry on relevant disposals. 

There are a number of reliefs and exemptions for IHT to consider each year, which could reduce the amount of IHT that your Estate pays on your death. The main allowances are:

Annual exemptions: Up to £3,000 can be given away each tax year and, if unused in a year, that amount can be carried forward for one year and utilised in the next.

Small gifts exemption: You can give up to £250 to as many people as you wish each tax year (this cannot be combined with your annual exemption).

Gifts out of income: If your income regularly exceeds your expenditure, you can give away the excess if part of a settled pattern (e.g. regular savings for a child, paying university tuition fees or rent). . 

Gifts for weddings or civil partnerships: You can give up to £5,000 to a child, £2,500 to a grandchild/great grandchild and £1,000 to any other person. 

Many Conservative MPs would like the Chancellor to reduce the rate of IHT or even go as far as abolish it. As this tax currently impacts around 4% of all estates, any changes to the current rules would not affect the majority of the public.

What should you do?

Consider whether you have utilised all the potential IHT reliefs and exemptions, particularly the exemptions which are available on an annual basis, subject to the one year carry forward provision. 

You may also wish to consider whether it is appropriate to obtain a wider review of your estate and Inheritance Tax position, as there may be further opportunities to reduce your IHT exposure or more generally to optimise the administration of your estate. For instance, our clients often have assets (e.g. the family home or collectables such as art, cars, etc) which they would like to remain within their family after their death, as opposed to being sold. In such cases, ensuring that the estate will be administered efficiently from a tax and cashflow perspective is vital to the future retention of these assets by the beneficiaries.