How to save on tax in 2024-25
How are you keeping your hard-earned income and returns? Last year, 71% of UK taxpayers who checked their tax code found they were overpaying. Indeed, over £8 billion could be owed to the British public from this issue alone.
Checking your tax plan could have enormous benefits, possibly putting a significant sum back into your pocket. In this guide, our Grantham financial planners outline the main taxes to watch as a UK taxpayer and how to legitimately keep more of your hard-earned money.
Income tax & NI
For most people aged 16 to 64, the two most familiar taxes will likely be income tax and National Insurance (NI). The first is levied on your salary or your profits if you are self-employed. In the 2024-25 tax year, you can earn up to £12,570 without income tax. This is known as the Personal Allowance.
Above that, there is the basic rate (20%) on income up to £50,270. The higher rate (40%) applies to income between £50,271 to £125,140. Over this threshold, the 45% additional rate comes into play.
Employees pay National Insurance (NI) once their earnings go over £242 a week (or someone’s self-employed profits exceed £12,570 a year). For the former, the rate is 8% until their earnings go over £50,270; at which point, a 2% charge applies.
Income tax can be mitigated in many ways. One idea is to use salary sacrifice with an employer to give up some of your salary in exchange for non-cash benefits (to keep more income out of higher tax brackets). For instance, this can be used for childcare, bikes and private medical insurance (PMI).
Another option is to use pension contributions to manage your tax bill. When you put money into a pension, the tax you would have paid can be added to the pension pot instead. This is called tax relief, and it is available at your highest marginal rate of income tax. For example, someone on the higher rate can claim 40% relief on pension contributions up to their annual allowance.
Capital gains tax
When you sell (“dispose of”) an asset for more than you originally paid for it, the UK government might want to tax the profits. Capital gains tax (CGT) varies according to your highest marginal rate of income tax. As such, by managing the latter, it can also benefit your finances elsewhere.
In 2024-25, the tax-free CGT allowance (the Annual Exempt Amount) is £3,000 per year. Above that, basic rate taxpayers pay 18% on their gains. Those on the higher and additional rates pay 24%. In past tax years, CGT rates varied if an asset was not classed as a residential property. Now, the rates have been equalised with property rates – 18% and 24%, respectively.
Capital gains tax can sometimes be mitigated by spreading out asset disposals across multiple tax years to fully use the Annual Exempt Amount. For married couples and civil partners, you can transfer assets between you without a CGT liability – enabling the other person to sell the asset(s) using their own tax-free allowance.
A third option is to use an ISA (Individual Savings Account) to build up an investment portfolio. In 2024-25, you can contribute up to £20,000 per year to a Stocks & Shares ISA and generate tax-free capital gains within the “wrapper”.
Dividend tax
If you receive a share of a company’s profits, this dividend could be subject to its own tax. The dividends might come from your own company and/or others – such as funds inside a general investment account (GIA).
In 2024-25, you can earn up to £500 from dividends (outside an ISA) without paying tax. Above this, dividend tax applies according to your highest marginal rate of income tax. For a basic rate taxpayer, 8.75% applies to received company profits. Those on the higher rate pay 33.75%, and those on the additional rate pay 39.35%.
Again, ISAs can help protect your income; any dividends earned from ISA investments are tax-free. Also, dividend-generating investments can be freely transferred between spouses and civil partners. This can help to save on dividend tax for a household. For instance, if your civil partner is a basic rate taxpayer and you are on the additional rate, moving dividend investments to their name could lower your household’s effective tax rate.
Tax on savings interest
If you hold cash savings, watch out for taxes. In 2024-25, a basic rate taxpayer can earn up to £1,000 from savings interest without paying any tax on it. This is called the Personal Savings Allowance (PSA), and it is lowered to £500 for those on the higher rate. A 0% rate applies to additional rate taxpayers.
ISAs can allow savers to completely shield their savings from interest. However, you need to consider the potential opportunity cost of using your £20,000 ISA allowance on cash savings instead of investments (which could generate higher returns). Other tax planning options include transferring savings to your spouse or civil partner to use their PSA, and considering assets like Premium Bonds – since the prize draws are not subject to tax on interest.
Invitation
If you’d like to make sure you’re taking the right steps to safeguard your financial future, please get in touch.
