02/04/24
The end of the 2023-24 tax year is fast approaching on April 5. This is an excellent opportunity to re-examine your routes to income and find the most tax-efficient ways to maximise your allowances in the coming financial year.
This year, several key changes have come into place that may affect decisions around your current income planning. Here’s a look at the 2024-25 tax year and the ways in which you can optimise your income plans by making the most of your allowances.
Dividends allowance cut by 50%
If you are the owner of a limited company and are used to taking dividends, it’s worth noting the tax-free allowance for dividends is changing. From April 2023, dividend allowance has been reduced from £2,000 to £1,000; this will be further reduced to just £500 as of April 2024.
This means you can earn up to £1,000 for the 2023/24 tax year and up to £500 for 2024/25, before paying any Income Tax on your dividends. This figure is over and above your Personal Tax-Free Allowance of £12,570 in the 2023/24 and 2024/25 tax years.
Dividends that exceed the threshold are taxed at 8.75% for Basic rate taxpayers and 33.75% for Higher Rate taxpayers. If you are married or in a civil partnership and own shares, you can split the dividend allowance between you to maximise your tax-free income.
Alternatively, you could transfer your personal savings and shares into a stocks and shares ISA. This approach also protects any increases in your investments from both Income Tax and Capital Gains Tax (CGT).
Additional Income Tax rate lowered
From April 2023, the additional 45% tax rate for taxable income over £150,000 has been lowered to £125,140. This comes after the additional rate was initially removed in the September 2022 mini budget but then later reinstated.
The other income tax thresholds are set to remain at their current rates until April 2028.
If you are a high-net-worth individual who’s recently qualified for the Additional Rate of Income Tax, you may be looking for ways to reduce your current income to bring you back under the threshold.
There are several ways to do this. If you have only recently qualified, there may be the option to bring forward unused allowance from the past three years, provided you haven’t already maximised your pension contributions in those years.
You should also consider maximising your pension contributions, making charitable donations, or sponsoring a community amateur sports club. Higher rate taxpayers can claim up to 20% tax relief on donations via their tax return while Additional Rate taxpayers can claim up to 25%.
Annual pension allowance increase
In an initiative that hopes to encourage people to stay in work longer before they retire, the government has increased the annual pension allowance from £40k to £60k. This is the first increase in 9 years.
It’s a welcome change, particularly for high-net-worth individuals looking to redistribute their income. There is also scope for those paying Higher and Additional rates of Income Tax to claim tax reliefs at 40% and 45% respectively on pension contributions. This depends on the type of pension scheme you have. If you’re unsure of your eligibility, our IFA can help.
Pension Lifetime Allowance scrapped
The pension lifetime allowance of £1.07m has also been scrapped, allowing investors to make unlimited pension contributions without incurring a tax charge. These changes are significant, particularly for those who fall into the higher taxable income brackets. Please seek advice from your financial adviser on available allowances for pension contributions.
Personal savings
You can earn up to £1,000 tax-free each year in personal savings, such as private sales, and £1,000 gross income from property. This would mean additional savings of £1,600 for a couple both paying the Higher Rate of Income Tax.
If your gross property income exceeds £1,000, you can either deduct your actual expenses as usual or offset the £1,000 tax-free allowance against your income. The best course of action will depend on the extent of your expenses for that specific year.
Remember to always seek advice from a qualified tax professional or financial adviser to ensure that your tax planning strategies are appropriate for your individual circumstances and compliant with current tax laws and regulations.
At CTT Private Client, our team of professional legal experts and IFAs can offer you the very latest insights into ways to maximise your tax allowances and optimise your income planning. Speak to a member of our team today to find you how we can help.
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