As we approach the end of the 2024/25 tax year, now is the time to take proactive steps to manage your financial position effectively. Reviewing your finances before April 5, 2025, can help you take full advantage of tax allowances, optimise your savings, and reduce your tax liabilities. Here’s your comprehensive checklist to ensure you’re making the most of the available opportunities.
Maximise Your ISA Allowance
Individual Savings Accounts (ISAs) are one of the most tax-efficient ways to save and invest, allowing interest, dividends, and capital gains to grow free from tax. For the 2024/25 tax year, the annual ISA allowance is £20,000 per person—this is a “use it or lose it” allowance, meaning any unused portion won’t carry over to the next year.
ISAs come in several types, catering to different financial goals:
- Cash ISA: A low-risk savings option, particularly attractive in light of rising interest rates.
- Stocks and Shares ISA: Suitable for those willing to accept market fluctuations in exchange for higher potential returns over the medium to long term.
- Innovative Finance ISA: Invest in peer-to-peer lending, which may offer higher rewards but also higher risks.
- Lifetime ISA (LISA): Designed for those aged 18-39 saving for their first home or retirement, with a 25% government bonus on contributions up to £4,000 per year.
- Junior ISA: Allows parents or guardians to save up to £9,000 a year for a child’s future, with tax-free growth until the child turns 18.
For couples, you can protect up to £40,000 from tax annually by using both partners’ ISA allowances.
Utilize Your Capital Gains Tax (CGT) Allowance
The CGT exemption has decreased in recent years. For the 2024/25 tax year, the exemption is £3,000, down from £12,300 in the previous year. Additionally, CGT rates have increased:
- Basic rate taxpayers now pay 18%
- Higher and additional rate taxpayers pay 24%
For property investors, from October 2024, these rates will apply to the sale of all second properties. To minimize tax, consider realizing any gains before April 5, 2025, while using up your CGT allowance.
An effective strategy is transferring assets between spouses. Since there is no CGT on transfers between married couples or civil partners, this allows both to use their respective CGT allowances. If one spouse is a basic-rate taxpayer and the other is in a higher or additional tax band, the assets can be shifted to take advantage of the lower CGT rate.
Another option is a “Bed and ISA” transaction, where you sell investments in a general investment account (GIA) and repurchase the same assets within an ISA. This enables you to crystallise any gains up to the CGT allowance and move them into a more tax-efficient wrapper.
Pension Planning
Pensions remain one of the most powerful tax-saving tools for retirement planning. Key advantages include:
- Tax relief: Contributions to pensions benefit from tax relief at your marginal rate, meaning that higher-rate taxpayers can receive up to 40% relief.
- No tax on growth: Your pension investments grow tax-free, which helps maximize returns over time.
- Tax-free lump sum: You can withdraw 25% of your pension pot tax-free, capped at £268,275.
The annual pension contribution limit for 2024/25 is £60,000 or 100% of your UK earnings, whichever is lower. For those earning above £260,000, this allowance is tapered down to a minimum of £10,000. Additionally, unused pension allowances from the past three tax years can be carried forward, allowing you to make larger contributions and benefit from tax relief.
For self-employed individuals, contributing to a pension through your limited company can also help reduce corporation tax liabilities. Even if you have no earnings, you can still contribute up to £3,600 annually and receive tax relief.
The 60% Tax Trap
If you earn over £100,000, you could fall into the 60% tax trap. This occurs because your personal allowance of £12,570 is reduced by £1 for every £2 you earn over £100,000. By the time your income reaches £125,140, you lose the full personal allowance, and your income is taxed at 40%.
One way to mitigate this is by making pension contributions. For instance, contributing £20,000 to your pension reduces your taxable income to £100,000, restoring your personal allowance and lowering your tax liability.
Inheritance Tax (IHT) Planning
Although inheritance tax doesn’t directly affect your retirement income, it’s important to factor it into your overall financial planning. The IHT threshold for 2024/25 is £325,000, with a 40% tax rate on estates above this amount. However, there are strategies to reduce IHT, such as the following:
- Annual exemption: You can gift up to £3,000 each tax year, and carry over any unused portion from the previous year. Married couples can give £12,000 in total.
- Small gifts: You can gift up to £250 to as many people as you like, as long as you don’t exceed the annual exemption.
- Gifts from surplus income: These are also exempt from IHT, which is particularly helpful if you’re concerned about pensions falling within your taxable estate in the future.
Additional Tax Planning Considerations
Changes in 2024/25 have impacted dividend income and savings. The dividend allowance has been reduced from £1,000 to £500. Beyond this, dividends are taxed at the following rates:
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
The Personal Savings Allowance (PSA) for interest remains at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers.
For those looking for higher-risk, tax-efficient investments, options like the Enterprise Investment Scheme (EIS), Venture Capital Trusts (VCTs), and the Seed Enterprise Investment Scheme (SEIS) provide substantial tax incentives. These are suitable for investors who have maximized other tax allowances and are willing to take on higher risks in exchange for potential rewards.
Wrapping Up
As the 2024/25 tax year draws to a close, taking action now can help you minimize taxes and optimise your financial situation. By utilizing available allowances, making strategic pension contributions, and exploring tax-efficient investment options, you can significantly reduce your tax liabilities and increase your retirement income.
If you’re unsure about your tax planning strategy, it’s always a good idea to consult with a financial adviser to ensure your decisions are in line with your long-term goals.
