A lot has happened over the last year. Have you reviewed your personal financial affairs recently?
With the 5 April 2025 tax year end fast approaching, it is a great time to review your finances to try to ensure you do not miss out on any available allowances and tax reliefs.
Avoiding common pitfalls and taking opportunities to use available allowances and reliefs tax will help to maximise your wealth.
Please note that throughout this article when we mention spouses and married couples, we are also referring to civil partners.
Personal Tax
1. Avoiding the 60% effective rate of income tax
English taxpayers will see both the personal allowance and higher rate thresholds frozen until at least 2028.
UK Income Tax on earned income 2024/25 |
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Tax Band | Range | Effective Tax Rate | ||
Personal Allowance | 0 - £12,570 | nil | ||
Basic Rate | £12,571 to £50,270 | 20% | ||
Higher Rate (no loss of personal allowance) | £50,271 to £100,000 | 40% | ||
Higher Rate (with loss of personal allowance) | £100,001 to £125,140 | 60% | ||
Additional Rate | £125,141 + | 45% | ||
The effective tax rate is particularly high in the £100,001 to £125,140 bracket because the personal allowance is reduced by £1 for every £2 of income, effectively increasing the 40% to a punitive 60%.
Possible ways to avoid the 60% tax trap:
Where you have surplus cash, pension contributions, gift aided charitable donations, or a combination of the two may help.
You might also want to look at timing of your income, where it is feasible to vary it.
It may be possible to find a more tax efficient way of splitting income with your spouse.
Business owners should also refer to our separate article on end of year tax planning for businesses, for other tax saving suggestions.
2. End of the Furnished Holiday Let rules
The long-established furnished holiday let rules are being abolished at the end of this financial year, meaning that holiday lets will be taxed the same as long term lets. Some of the main differences are that tax relief on interest will be restricted to the basic rate, valuable capital gains reliefs will no longer be available and, if the property is owned by a married couple, the income will need to be reported equally. Further information is available in our earlier news article.
This is a complex area and the tax planning will need to be tailored to your individual circumstances. If you have a holiday let and are yet to talk to us about the changes, please get in touch as soon as possible. The changes are less than a month away.
3. High Income Child Benefit Charge (HICBC)
Households claiming Child Benefit will be subject to the HICBC where income of the higher is over £60,000. Where the top slice of income is in the £60,000 to £80,000 bracket, some of the Child Benefit will have to be paid back. Income over £80,000 will give a HICBC charge equal to the full amount of Child Benefit received. As an example, if a parent of three children is the higher earner with income of £75,000, the top £15,000 of income would suffer tax of £6,000 (at 40%) and £2,361 HICBC, giving a total cost of £8,361, an effective combined tax and Child Benefit clawback rate of more than 55%.
There are things which can be done. Examples are making pension contributions or making gift aid donations. Distributing income more evenly with your spouse can also help minimise the charge, where this is possible.
4. Tax-free childcare
The tax-free childcare scheme gives up to £2,000 annually per child and can be used in a variety of ways. More information about how this can be used can be found here.
Eligibility is lost where one parent’s income exceeds £100,000, so having income just over this bar is unhelpful. Making personal pension and gift aid contributions may be a very useful way of reducing net income. Salary sacrifice may also be useful, for example, if you can take part of your salary as a pension contribution or by having a tax efficient company car.
Where possible, you could look at any ways to split income more evenly with your spouse.
5. Using the marriage allowance
Spouses may be entitled to claim the Marriage Allowance. Essentially it is of benefit where one spouse is a basic rate taxpayer and the other has spare personal allowance.
This could save you up to £252 in the 2024/25 tax year and can be backdated for 4 years if you have not claimed in earlier years.
6. Timing of dividends
The £500 dividend allowance (the individual’s tax-free amount) cannot be carried forward if it is not used so, where there are available profits, we would always recommend making a distribution before the end of the tax year, where possible. Where dividends can be timed to suit the shareholders, care needs to be taken to consider the level and timing of them considering the individual’s individual circumstances.
7. Capital Gains Tax Annual Exempt Amount
Individuals currently have a £3,000 capital gains exemption, which has been reduced substantially over recent years.
This is another ‘use it or lose it’ allowance. Given how low the allowance is, it is generally advantageous to realise some gains each year to ensure the allowance is used, to try to avoid realising a big gain in one particular tax year.
You could sell assets which have made a loss to set against gains from another, or transfer assets between you and your spouse (but this does not work for those not in marriage or civil partnership) before disposal. This could potentially give you two annual exempt amounts and two basic rate bands.
If you have been dealing in crypotassets, you will need to review your transactions as HMRC generally treat these as capital assets for tax purposes.
We always recommend seeking advice from a suitably qualified adviser when making investment decisions.
8. Inheritance Tax (IHT)
The nil rate band has been £325,000 since 2009 and will remain so until 2028. Especially because property prices have increased over recent years, more estates are now paying IHT.
The IHT changes announced in the Budget are very wide reaching. Whilst pension pots are not going to be subject to IHT until 2027, we suggest that you get advice now from a suitably qualified financial adviser to start planning ahead for the changes.
The £1m restriction to Business Property Relief (BPR) and Agricultural Property Relief (APR) from 2026 is a big change. We suggest that business and agricultural property owners get specialist advice to make sure their Will is up to date, and appropriate, given the announced changes. Each family’s circumstances are unique to them, so please speak to us about yours.
You should also consider organising Lasting Powers of Attorney for if you become unable to make decisions yourself. It is also advisable to ensure your pension provider has a letter of wishes as to what you would like to happen to your pension pot when you die.
Making lifetime gifts can useful to reduce your family’s IHT exposure. Individuals have an annual tax-free gift allowance of £3,000. Where the allowance was not used for the previous tax year it is carried forward one year. You can gift more than this to your loved ones if you wish, but the excess is what is called a Potentially Exempt Transfer. It becomes exempt after 7 years, but will be taken into account if you were to die sooner.
Individuals can also make as many gifts as they wish of up to £250 per recipient.
Gifting out of income is a valuable IHT exemption which is often overlooked. The exemption is only available for gifts made out of surplus net income, not from capital, and must form part of the donor’s normal expenditure.
9. Tax efficient investments
ISAs are tax efficient savings or investments. ISAs are held in a tax-free wrapper either in cash or in stocks and shares. The maximum investment is £20,000 in 2024/25. As this is not carried forward from one year to the next, you only have until 5 April to use this year’s allowance.
A Lifetime ISA is for those aged between 18 and 40. The maximum investment per tax year is £4,000. The main appeal of a Lifetime ISA is that the government will add a 25% bonus to your investment which could mean a top up of £1,000 per year.
To retain the top up, withdrawals must be when you either aged 60 or over, buying your first home or if you are terminally ill.
Junior ISAs can either be cash or stocks and shares. Contributions are limited to £9,000 in 2024/25. With rising interest rates these can shield tax on a child’s interest over £100 on funds gifted from parents as this income would otherwise be chargeable on the parent.
Other investments on which tax relief is available are Venture Capital Trusts (VCTs), Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). These are specialised and potentially higher risk investments and we would always recommend seeking appropriate advice from a suitably qualified adviser before investing in them.
10. Pension savings
The lifetime allowance was scrapped from 6 April 2024. However, the annual allowance for pension contributions remains which is currently the lower of £60,000 or 100% of your qualifying earnings. There is a reduced annual allowance of between £10,000 and £60,000 for high earners. This is too complex to fully explain here, but please contact us for advice if you think this might apply to you.
Unused allowances for the 3 previous tax years can also be used if you were a member of a pension scheme and did not utilise the allowance in full in those years.
With many of the Income Tax traps we have highlighted, pension contributions can be a really tax efficient way of avoiding them.
11. Reliefs available for employees
As an employee there are a few reliefs that can be claimed in respect of your employment. Examples of things you can claim for are professional subscriptions, having to work from home, mileage paid at less than HMRC’s agreed rate and washing a uniform yourself.
Conclusion
If you want to talk to us about any of the points raised, please get in touch as we are here to help.
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