How to navigate income taxes 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.
Income tax is one of the UK’s three vital revenue streams for the government’s coffers. In 2023-24, it raised £277 billion for the Treasury. Together with VAT and National Insurance (NI) contributions, income tax comprises three-fifths of all revenues.
From an individual perspective, how can you ensure that you are approaching income tax efficiently? Whilst we should all pay our dues, it makes little sense to pay more than necessary – especially when you have your own financial goals, aspirations and responsibilities.
Below, our Grantham financial planners offer an updated guide to income tax for the 2024-25 tax year. We explain how the income system broadly works and how it can affect your finances. Our team also shares ideas about how to mitigate a needless tax liability.
We hope these insights are helpful. 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
UK income tax: an overview
Most people understand income tax as a tax on salary. However, it can also apply to other income sources, such as rental income from Buy-to-Let tenants and self-employed earnings. The UK operates a “progress” tax system for these income sources—i.e., the more someone earns, the higher the tax rate they tend to pay.
For instance, in 2024-25, a Basic Rate taxpayer will pay 20% on their income. A Higher Rate taxpayer, by contrast, will pay 40% on income above the Basic Rate. In 2024-25, the income tax bands are as follows:
- 0% tax on income up to £12,570 (known as the Personal Allowance).
- 20% on earnings between 12,571 and 50,270 (the Basic Rate).
- 40% on earnings between 50,271 and 125,140 (the Higher Rate).
- 45% on earnings between Over 125,140 (the Additional Rate).
These earnings thresholds apply within a single tax year, from 6 April to 5 April the following year. Income tax bands are different in Scotland.
Why your tax rate matters
Your highest marginal rate of income tax has important knock-on effects on your wider financial plan. This is especially true in two key areas: savings and pensions.
In 2024-25, a UK taxpayer is typically entitled to a Personal Savings Allowance (PSA). This has a big impact on your tax liability for savings interest. For instance, a Basic Rate taxpayer gets a £1,000 PSA each tax year. However, someone on the Higher Rate only has a £500 PSA.
Many taxpayers get “caught out” by these varying thresholds – especially during periods of higher interest rates, which might inadvertently push their savings above their PSA. Here, a saver can protect against unnecessary tax on their savings interest by exploring alternative “vehicles” outside of regular savings accounts (e.g. Cash ISAs or Premium Bonds).
Your marginal rate of income tax has important implications for pensions, including how much tax relief you can receive on your contributions (and your annual allowance).
In 2024-25, a Higher Rate taxpayer gets 40% tax relief on their contributions. By contrast, a Basic Rate taxpayer only gets 20% relief (i.e. it costs 80p to contribute £1).
Moreover, a Higher Rate taxpayer could enjoy up to £60,000 in annual allowance (the maximum that someone can contribute to their pensions in a tax year, assuming no “carry forward” is being used). A Basic Rate taxpayer, however, is constrained by their total earnings for the tax year. For instance, if they earn £30,000 in 2024-25, then this is the maximum amount they can contribute to their pensions whilst enjoying tax relief (again, assuming no “carry forward”). Please note that only specific earnings, called ‘Relevant UK Earnings’, count towards the pension Annual Allowance.
Navigating income tax prudently
The above presents a complicated dilemma for many taxpayers. For savers, it almost seems better to be a Basic Rate taxpayer due to the higher PSA threshold on offer. For those focused on building pension savings, however, being a Higher Rate taxpayer seems a better deal due to the higher tax relief available and greater retirement savings.
This helps illuminate the importance of establishing your financial position and goals when building a tax plan. For instance, if you find yourself in a new job which brings you into the Higher Rate (e.g. due to a promotion), then this can be an ideal time to accelerate your retirement savings rather than simply spending the extra money.
Those with a spouse or civil partner can also potentially reduce their overall household tax bill by using careful planning. For example, suppose one partner is a Higher Rate taxpayer, and the other person only pays the Basic Rate. Therefore, one option the couple might pursue is to concentrate the family’s savings (e.g. cash in regular savings) in the second person’s name. This is because they enjoy a higher PSA. Simultaneously, the household might focus their retirement savings on the first person’s scheme(s) because they receive greater tax relief.
Invitation
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
