The 2024-25 tax year is now well underway which means you’ve got a fresh set of allowances and exemptions to take advantage of. We take a look at how you can make the most of the latest tax breaks.
From claiming annual exemptions on capital gains tax (CGT) to arranging inheritance tax (IHT) gifts, putting this year’s raft of tax breaks into action can be a bit of a chore. But it’s well worth the effort as it could make a substantial difference to your future wealth.
Saving and investing
To avoid paying tax on money you’re saving in cash or investment accounts, it’s important to take advantage of individual savings accounts (ISAs). This will ensure your money is sheltered from tax as it grows in value, and you won’t have to pay any tax when you take it out either.
This year there haven’t been any changes to the ISA allowance – so you can still invest £20,000 across the different types of ISA. Children have their own Junior ISA allowance which remains at £9,000 this year.
ISA rule relaxations
This April did see the introduction of a few ISA rule relaxations which – while not revolutionary – could add a bit of flexibility to your financial planning.
For the first time you can now pay into more than one ISA of the same type, each year – making it easier to keep your savings in different pots. So, you could choose to pay into an easy-access ISA – for emergency savings – and a fixed-rate ISA for cash you can lock away for a year or more.
April also saw the end of ‘all or nothing’ transfer rules. That means it’s now possible to transfer part of an ISA, without moving the whole lot. In particular, this will make it easier for you to move money between cash and stocks and shares ISAs.
For example, a person with £15,000 in a cash ISA, might decide they have more than they need in cash, and transfer £5,000 into a stocks and shares ISA. Alternatively, an investor with £100,000 in a stocks and shares ISA, might move £10,000 into a cash ISA to cover an upcoming expense, or to reduce risk in their portfolio.
Watch out for the new CGT and dividend tax allowances
The latest changes to the CGT and dividend tax allowances have increased the importance of protecting your wealth in tax wrappers like ISAs.
This April the CGT allowance was cut from £6,000 to just £3,000 (from a high of £12,300 two years ago). The dividend allowance was also halved from £1,000 to £500 this year. While these are hefty cuts, don’t worry there are still things you can do.
If you have investments in a general investment account (GIA) that aren’t sheltered from tax, it is possible to sell them and immediately re-buy them within a stocks and shares ISA in a process known as Bed & ISA. You just need to ensure you have enough ISA allowance remaining and that the amount you sell doesn’t see you breach the CGT allowance. For larger gains, it may make sense to move the money into an ISA gradually, over a number of tax years.
Alternatively, if you want to boost your retirement finances you can use similar Bed & SIPP rules to move taxable investments into your pension.
Retirement planning
When it comes to retirement saving, the tax breaks on pensions are unrivalled, so it makes sense to pay in as much as you can.
The pensions allowance is currently 100% of your earnings, up to a maximum of £60,000 a year, after it was increased from £40,000 in April 2023. But, if you are in a position to pay in more than that this year, you might be able to.
Carry forward allows you to pay in any unused pension allowances from the last three tax years. That gives savers with cash to spare, up to £200,000 to pay into their pot this year (up from £180,000 in 2023-24). The catch is that you need to have earnings high enough to cover the total value of your contribution in the current tax year. Remember earnings don’t include income from sources such as dividends on shares, interest on bank accounts or rent from property.
This won’t be an option for everyone, but it can come in handy if you have a windfall or a fluctuating income and need to make up for lost time.
Many, however, will have a lower pensions allowance.
Think carefully before accessing your pension
If you’ve already taken income from your pension, you will have triggered the money purchase annual allowance and will only be able to pay in £10,000 a year. You’ll also no longer be able to carry forward any unused allowances from previous tax years. So it’s important to think carefully before taking income out of your pension while you’re still contributing.
The highest earners will have a lower allowance too. The annual allowance is tapered down from £60,000 when you have an ‘adjusted income’ (your total income plus your employer pension contributions) over £260,000 and gradually reduces the amount of money you can pay into a pension each year. The allowance is reduced by £1 for every £2 over £260,000 and will only stop dropping once it reaches £10,000 – for those earning £360,000 a year or more.
Streamlining your estate
Bereaved families are paying more inheritance tax (IHT) than ever with receipts hitting £7.5 billion in the UK last tax year.
The tax is payable at a rate of 40% on estates worth over £325,000. Although, many people can pass on more than that tax free. If you have direct descendants and you’re passing on a family home, for example, you can pass on a further £175,000 giving a total tax-free estate of £500,000. For a married couple that can mean a total allowance of £1,000,000 before IHT may be due. Nonetheless, rising house and asset prices, in conjunction with frozen allowances, mean increasing numbers will leave behind taxable estates.
One of the most straightforward ways of reducing the amount of tax you pay is to give away money or assets that would otherwise be taxable before you die.
Gifts are considered to be potentially exempt transfers – which means tax may still be payable on them, depending on when you die. For gifts that exceed £325,000 a gradually reducing rate applies over time, but you need to survive seven years for gifts to become completely tax free.
Everyone can also give away £3,000 IHT free each year, known as the annual exemption. This allows you to gift up to £3,000 each year split between as many recipients as you like. And if you didn’t use this in the previous tax year, you can bring it forward one year and give yourself up to £6,000 to give away. That means a couple gifting for the first time can give away £12,000 in 2024-25 between them.
There’s also the ‘small gift exemption’ that allows you to make as many gifts of up to £250 as you choose in a year, as long as each one goes to a different person. You can also give away any extra income you have that you don’t need to fund your current lifestyle as regular gifts – such as paying a family member’s rental income.
While the exemptions are not huge, used over the years they can take a significant chunk out of your estate and give you the pleasure of helping out loved ones.
When it comes to IHT, there’s a lot you can do to make sure that you leave as much as you can to the people you choose rather than to HM Revenue and Customs. But it’s important to understand the tax landscape to make sure your gifts make effective use of the various exemptions and allowances available. The best way to manage a potential IHT bill will depend on your individual circumstances. It’s also very important to make sure you don’t give away money you might need in later life. If you are parting with serious sums, it usually makes sense to take professional advice. Given the sensitivity and possible complexity of passing on personal wealth, you may want to speak to your abrdn financial planning adviser. If you don’t already have one, you can find out more about how we could help.
The power of joining forces
If you’re married, or in a civil partnership, you can effectively double your allowances by joining forces and thinking carefully about which assets go in which name.
Married couples can transfer assets between each other without paying tax, making it easier to take advantage of both sets of CGT and dividend allowances. And, even if tax can’t be avoided altogether, you might still be able to cut your tax bill by transferring assets to your spouse if you’re a higher-rate taxpayer facing a CGT bill and they pay a lower rate of tax.
Similarly, couples, whether they are married or not, can shelter up to £40,000 of wealth from tax in an ISA each year or save up to £120,000 in pensions a year between them. So, if you’ve reached your limit but your partner hasn’t, you could make pension contributions on their behalf, or pay into their ISA. But, just be aware that if you aren’t married and are transferring assets to a partner or investing in one of their accounts, you won’t have the same degree of legal protection if you separate.
Think about getting advice
Careful planning is important to help look after your wealth now, and to make sure that you and your loved ones get the maximum benefit from that wealth – both in your lifetime and beyond. If you have any questions about making use of these tax breaks, speak to your financial planner.
If you don’t already have a planner, getting professional financial advice can help get your affairs in order. While there’s generally a charge for advice services, this could pay for itself in the long run by way of improved returns on your money, tax savings and, importantly, peace of mind.
Find out how abrdn's financial planning services could help you make the most of your tax allowances.
The information in this article should not be regarded as financial advice. Information is based on our understanding in May 2024. Tax rules can always change in the future. Your own circumstances and where you live in the UK could have an impact on tax treatment.