Planning ahead for the upcoming tax year is one of the most effective ways to ensure you keep as much of your hard-earned money as possible. Using the tax reliefs and allowances available, you can reduce your liabilities and increase your savings.
Whether you’re a high earner, self-employed, or simply trying to manage your finances more efficiently, there are key strategies to consider when it comes to personal tax planning.
Make the most of your personal allowance
Everyone in the UK has a personal allowance, which is the income you can earn before paying income tax. For the 2024/25 tax year, this allowance is £12,570. However, once your earnings exceed £100,000, your personal allowance starts to reduce by £1 for every £2 you earn. If your income is approaching this threshold, it’s worth considering ways to reduce your taxable income to retain your full personal allowance.
This could involve making pension contributions, donating to charity, or using tax-efficient investments like ISAs to ensure you stay below that £100,000 limit.
Maximise your pension contributions
Pension contributions remain one of the most tax-efficient ways to save for the future while reducing your tax bill today. When you contribute to a pension, you benefit from tax relief at your highest income tax rate, meaning a £100 contribution could effectively cost you £60 if you are a higher-rate taxpayer.
In addition, the pension annual allowance allows you to contribute up to £60,000 each year, potentially carrying forward any unused allowance from the previous three years. By making regular contributions, you can secure your financial future and enjoy immediate tax savings.
Utilise your ISA allowance
Individual Savings Accounts (ISAs) are a simple yet effective way to shelter your savings from tax. For the 2024/25 tax year, the ISA limit remains at £20,000. Any income or gains generated within an ISA are tax-free, making it an attractive option for anyone looking to grow their savings without worrying about tax liabilities.
If you haven’t yet used your full allowance, consider topping up your ISA before the end of the tax year to benefit from this valuable tax relief. It’s also worth exploring different types of ISAs, such as Stocks and Shares ISAs or Lifetime ISAs, depending on your long-term financial goals.
Consider salary sacrifice
As an employee, salary sacrifice arrangements can help you save on tax and National Insurance contributions. Under this scheme, you give up part of your salary for a non-cash benefit, such as pension contributions, childcare vouchers, or even a company car.
Reducing your gross salary can lower your income tax and National Insurance liabilities while still enjoying the benefits. However, it’s important to ensure that salary sacrifice doesn’t reduce your salary below the national minimum wage.
Review your investments for tax efficiency
Investment income, whether from dividends, rental properties, or other sources, can quickly add to your tax bill if not managed effectively. One way to reduce your tax burden is by taking advantage of the Dividend Allowance, which lets you receive up to £500 of dividends tax-free in the 2024/25 tax year.
In addition, if you have capital gains from selling investments, consider using your Capital Gains Tax (CGT) allowance, which allows you to realise gains of up to £3,000 in the current tax year without paying CGT. You can potentially reduce your tax liabilities by spreading the sale of assets over multiple tax years.
Claim tax relief on charitable donations
If you’re in a position to make charitable donations, you can claim tax relief on any gifts made under the Gift Aid scheme. When you donate to a registered charity, they can claim an additional 25% on your donation from the government, and if you’re a higher-rate taxpayer, you can claim the difference between the basic rate and higher rate of tax through your self-assessment tax return.
For instance, if you donate £100, the charity will receive £125, and if you pay tax at 40%, you can claim back £25. This provides a double benefit – supporting causes you care about while reducing your tax bill.
Plan for inheritance tax (IHT)
Inheritance tax (IHT) can significantly reduce the value of your estate when you pass away, but with careful planning, you can minimise its impact. Estates worth more than £325,000 are liable for IHT at 40%, although this threshold can increase to £500,000 if you leave your main home to direct descendants.
One way to reduce your estate’s value for IHT purposes is by using annual exemptions, such as the £3,000 annual gift exemption. You can also give away £250 to as many individuals as you like each year, free from IHT. By planning ahead and making gifts during your lifetime, you can ensure more of your estate goes to your beneficiaries instead of the taxman.
Seek professional advice
Tax planning can be complex, and what works for one person might not necessarily work for another. That’s why it’s important to seek professional advice to ensure you’re making the most of the allowances and reliefs available to you.
Whether you’re looking to optimise your pension contributions, manage your investments more efficiently, or reduce your IHT liability, we can help tailor a strategy that suits your financial circumstances and goals.
At the end of the day, smart tax planning is about being proactive and taking control of your financial future. By staying informed and seeking expert advice, you can lower your tax bill and make your money work harder for you.
For more tailored tax advice ad tax planning tips, Pearson May is here to help.