Making use of allowances and exemptions can lower your tax burden and allow you to make the most of your finances. The current tax year will conclude on 5 April 2025, resetting various tax-efficient allowances and exemptions. With that in mind, here are five key ones to consider taking advantage of before the 2025/26 tax begins.
1. ISA allowance
Individual Savings Accounts (ISAs) remain a popular way to save and invest in a tax-efficient manner. According to the latest government data, 12.4 million ISAs were opened in the 2022/23 tax year, with a total of approximately £71.6 billion contributed.
For the 2024/25, the maximum amount you can deposit into ISAs is £20,000. With a Cash ISA, the interest earned is free from Income Tax, while investments held in a Stocks and Shares ISA are exempt from Capital Gains Tax (CGT) on any growth or profits.
ISA allowances operate on a “use it or lose it” basis, meaning unused allowances do not roll over into the next year. Reviewing your savings and investment plans now could help you make the most of this opportunity before the tax year ends.
It’s worth aligning your ISA contributions with your goals. For short-term objectives, a Cash ISA might be appropriate, offering security and liquidity. For long-term goals, typically more than five years away, you may want to explore whether investing via a Stocks and Shares ISA could better suit your needs.
If you’re aged between 18 and 39, you could also consider opening a Lifetime ISA (LISA). For 2024/25, you can deposit up to £4,000 into a LISA and receive a 25% government bonus. Note that the LISA contribution counts towards your overall £20,000 ISA allowance.
Keep in mind that withdrawing money from a LISA before age 60 for reasons other than purchasing your first home incurs a 25% penalty. As such, LISAs are often most suitable for those saving to buy their first property.
2. Dividend Allowance
If you own a business or hold shares in certain companies, you may receive dividend payments.
Dividends falling within your Personal Allowance, set at £12,570 for the 2024/25 tax year, are tax-free. Additionally, you can earn up to £500 in dividends without incurring Dividend Tax, thanks to the Dividend Allowance. This makes dividends a potentially tax-efficient way to supplement your income.
It’s important to note that the Dividend Allowance cannot be carried over to future years, so it’s a “use it or lose it” benefit.
Even if your dividend income exceeds the allowance, it may still be a more tax-efficient option than receiving an equivalent amount subject to Income Tax. The Dividend Tax rate you pay is determined by your Income Tax band. For the 2024/25 tax year, the rates are:
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
Incorporating dividends into your financial strategy could help reduce your overall tax liability, even if you’re required to pay some Dividend Tax.
3. Capital Gains Tax Annual Exempt Amount
Chancellor Rachel Reeves introduced significant changes to Capital Gains Tax (CGT) in the Autumn Budget, including raising the main rates. As a result, your tax bill may be higher than anticipated when you sell assets at a profit.
Indeed, the Office for Budget Responsibility estimates CGT could raise £15.2 billion in 2024/25, which may then increase to £23.5 billion in 2028/29.
As of 30 October 2024, the revised CGT rates are:
- 24% for higher- or additional-rate taxpayers.
- 18% for basic-rate taxpayers, provided the gains remain within the basic-rate Income Tax band.
However, the Annual Exempt Amount allows you to make up to £3,000 in gains during the 2024/25 tax year without incurring CGT. If you’re considering selling assets, careful planning to utilise this exemption before the tax year ends could help reduce your tax liability.
Remember, unused Annual Exempt Amounts do not carry over into the following year, so it’s a “use it or lose it” benefit.
4. Pension Annual Allowance
Pensions are a highly tax-efficient way to prepare for retirement, as contributions qualify for tax relief, and any growth or returns within the pension are free from tax.
For the 2024/25 tax year, the Pension Annual Allowance is £60,000. This is the total amount you can contribute to your pension each year while still benefiting from tax relief. Contributions made by your employer or third parties also count toward this limit. However, tax relief is only available on contributions up to 100% of your earnings, or £2,880 for non-taxpayers.
In certain circumstances, your Annual Allowance may be reduced:
Tapered Annual Allowance: If your adjusted income exceeds £260,000 and your threshold income is more than £200,000, your allowance will gradually decrease. For every £2 above the adjusted income threshold, your allowance reduces by £1, down to a minimum of £10,000 for incomes of £360,000 or more.
Money Purchase Annual Allowance (MPAA): If you’ve accessed your pension flexibly, the amount you can contribute tax-efficiently is reduced to £10,000 annually.
If you haven’t used all of your Annual Allowance in previous years, you can carry forward unused allowances from up to three tax years. For instance, you have until 5 April 2025 to use any remaining allowance from 2021/22. This can provide a valuable opportunity to maximise your pension contributions.
5. Inheritance Tax annual exemption
Government figures suggest Inheritance Tax (IHT) bills are on the rise. Indeed, IHT tax receipts between April 2024 and October 2024 were £5 billion – around £500 million higher than the same period last year.
If your estate may be subject to IHT, gifting wealth during your lifetime can be an effective way to reduce a future tax liability. However, not all gifts are immediately exempt from IHT. Some, known as “potentially exempt transfers,” remain part of your estate for up to seven years.
Taking advantage of exemptions and allowances that allow you to make gifts without triggering IHT could be a key part of your estate planning.
For the 2024/25 tax year, the annual exemption allows you to gift up to £3,000 without it being included in your estate for IHT purposes. If you didn’t use this exemption in the previous tax year, you can carry it forward, enabling you to gift up to £6,000 tax-free in a single year.
In addition to the annual exemption, there are other strategies and allowances that may help reduce the potential IHT liability on your estate. Get in touch to explore the steps you could take to safeguard your wealth for your loved ones.
Get in Touch to Plan Your Year-End Tax Strategy
Feel free to contact us if you’d like to explore how you could use allowances and exemptions to reduce your tax bill for the 2024/25 tax year. We’ll help you identify the steps that align with your personal circumstances and financial goals.
Important Information:
This article is for general informational purposes only and does not constitute financial advice. Any advice should be tailored to your specific situation. The content is intended for retail clients only.
Please do not take action based solely on the information in this blog. All details are based on our current understanding of HMRC regulations, which may change in the future.
The value of investments, and any income they generate, can rise or fall, and you may not get back the amount you originally invested. Past performance is not a reliable guide to future returns.
Pensions are long-term investments typically not accessible before the age of 55 (rising to 57 from April 2028). Pension fund values can fluctuate, affecting the benefits available. Past performance should not be relied upon as a predictor of future outcomes.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate tax planning, Inheritance Tax planning, or estate planning.
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