How not to overpay on tax in 2024
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
The UK currently faces its highest tax burden in 70 years, set to rise to 37% of national income in 2024. The Chancellor has hinted that tax cuts could arrive in the upcoming Spring Budget, although what form these might take is not yet clear. The prospect of a Labour government after the next general election (due by January 2025) lowers the odds of tax cuts.
These political factors, combined with higher inflation rates over the past two years, make it more important than ever that taxpayers have a tax-efficient financial plan. Below, our Grantham financial planners offer some ideas about how to avoid overpaying on tax in 2024.
We hope these insights are helpful to you. To discuss your own financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
Beware of stealth taxes
The brief Liz Truss government attempted to move the UK towards lower taxes in September 2022. However, the plans were soon abandoned and a change of Prime Minister and cabinet brought tax policy largely back to the status quo – i.e. maintaining income tax rates and thresholds. Unfortunately, this brings a hidden, looming threat over many taxpayers’ finances – that is, “fiscal drag”.
Here, a taxpayer may unwittingly be dragged into a higher tax bracket (e.g. the 40% Higher Rate) as she receives successive pay rises. Indeed, there is some concern that people receiving the State Pension may need to pay income tax on the income if thresholds are not changed in the coming years. In 2023-24, the tax-free Personal Allowance is £12,570 and the full new State Pension is £10,600.20 per year. If the latter continues to rise each year under the “triple lock” system and the Personal Allowance is kept the same, then it could only be a few years before the State Pension, in itself, crosses the tax-free threshold.
For those with earnings approaching a higher rate of income tax, it is worth exploring your options with a financial adviser. This is particularly important for those earning between £100,000 and £125,140. Within this range, earnings are taxed at an effective rate of 60% due to the Personal Allowance “taper” (which gradually eliminates the tax-free £12,570 allowance). Here, a key tool to consider is your pension. By increasing gross contributions, an individual can expand the band of income which is taxed at the basic rate.
Invest prudently
In April 2023, two key tax-free allowances for investors were reduced. The Capital Gains Tax (CGT) annual exemption was lowered from £12,300 in the previous year to £6,000. In 2024, it is expected to fall even further to £3,000. The tax-free dividend allowance also fell from £2,000 to £1,000 in April 2023 and is planned to fall even more to £500 this year.
Maximising your tax-free returns will, therefore, likely be more challenging in 2024. Yet there are many tools still available in your tax planning arsenal. There is your ISA, of course, where you can contribute up to £20,000 each year and receive tax-free interest, capital gains and dividends from the investments. Your pension is also a very effective “vehicle” for long-term investing, allowing for tax-free capital growth as well as tax relief on contributions via the annual allowance rules.
Watch out for interest
Many savers have welcomed recent news about rising savings rates offered by banks in late 2023. It is now possible to find accounts with rates of 5% or more. However, many savers have not noticed that a higher income from interest could potentially lead to a tax bill. Make sure you are not caught out.
In 2023-24, a basic rate taxpayer can earn up to £1,000 from interest without paying tax. For someone paying the higher rate, the tax-free threshold is £500. Before 2022, when savings rates were very low, it required large sums of cash savings for an individual to cross their Personal Savings Allowance. Now in 2024, a basic rate payer earning £20,000pa, with £25,000 in savings earning 5% interest, would get £1,000 gross interest – taking her up to her tax-free Personal Savings Allowance.
To guard against taxes on savings, a taxpayer can explore various options with their financial adviser. One idea is to save into Premium Bonds. These easy-access investments are guaranteed by the Financial Services Compensation Scheme and offer the chance to win tax-free prize draws. Since there is no interest payment on offer, Premium Bonds can be a useful place to “park” cash savings which might result in breaching the taxpayer’s Personal Savings Allowance.
Invitation
These are just a few of the key areas of tax planning to consider in 2024 as households continue to wrestle with various financial pressures. Other important areas to consider discussing with a financial adviser include inheritance tax (IHT) and tax planning for married couples or civil partners (who have more tax planning options available to them – e.g. tax-free asset transfers to help mitigate capital gains tax).
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
