Get ready for April: how to reduce your personal tax bill

As the end of the 2024-25 tax year starts to come into view, it is an opportune moment to revisit and refine your financial strategies to minimise self-assessment tax liabilities. To assist you in taking full advantage of the available tax breaks and allowances, here's an overview of the key considerations.

Income Tax Framework for 2024-25

The UK employs a progressive tax system, applying lower rates to lower incomes. Understanding where your income falls within these brackets is crucial for effective tax planning.

Taxis levied not only on earnings but also on income derived from investments,pensions, property and savings. ‘Fiscal drag' (not uprating tax allowances each year in line with inflation) means tax thresholds this tax year are the same as the previous year, indirectly increasing tax burdens as incomes rises with inflation. 

In the October 2024 budget, the chancellor, Rachel Reeves, said she would not extend the freeze on allowances beyond 2027-28, where it was set by Rishi Sunakin April 2022 as chancellor.

Maximising Personal Financial Allowances

Personal and Marriage Allowance

The personal allowance for everyone in the UK is £12,570. This allowance diminishes by £1 for every £2 earned over £100,000, disappearing entirely once earnings surpass £125,000. Married couples or those in civil partnerships can transfer up to £1,260 of their personal allowance to their partner, optimising tax savings when incomes permit.

Savings and ISAs

Savings can attract tax-free interest, up to £1,000 for basic rate taxpayers and £500 for those at the higher rate. The annual ISA contribution limit remains at£20,000, allowing for tax-free growth on savings and investments held within ISAs.

Dividend Income

The dividend allowance allows for the first £2,000 of dividend income to be tax-free, benefiting shareholders and company directors. Dividend income is taxed according to the income tax rate bands: basic, higher and additional.

Pension Contributions

Increasing pension contributions can yield significant tax efficiencies. Individuals can contribute up to £60,000 or 100% of their earnings annually, with tax relief enhancing the value of these contributions. Contributions can be critical in lowering taxable income, especially for higher earners.

In addition money in a pension is not subject to capital gains tax and sums remaining at death do not attract inheritance tax.

Business owners can make pension contributions via their company, which reduces their liability for corporation tax.

Child Pension Contributions

Parents can contribute £2,880 per annum to a child's pension, topped up by a government bonus, making the total £3,600 each year.

Investment Opportunities and Reliefs

Venture Capital Trusts (VCTs)

By investing up to £200,000 each year, you receive 30% tax relief.

Enterprise Investment Scheme (EIS)

This offers 30% tax relief on investments in eligible companies, providing a method to defer capital gains tax.

Capital Gains Considerations

For the 2024-25 tax year, the capital gains tax-free allowance stands at £6,000.This tax is levied on the profits from selling certain assets, including shares and properties other than a main residence.

Expenses Claims for PAYE Employees

Employees can claim for travel expenses linked to work (excluding regular commuting) and homeworking costs. This extends to uniforms and necessary subscriptions, although personal expenses remain outside the claimable limits. 

Self-Employment Expenses

Sole traders and other self-employed individuals can claim deductions on their tax bill for a range of expenses, particularly for work, home and travel-related costs.

Charitable Contributions

Donations to charitable organisations can mitigate tax liabilities, with higher rate taxpayers reclaiming relief on gifts made under the Gift Aid scheme.

Landlord Tax Strategies

Landlords can obtain tax relief limited to 20% on buy-to-let mortgage interest and usually full relief on operating costs. In addition, the rent a room scheme allows homeowners to earn £7,500 tax-free from letting a room in their home.The home should not also be used as an office. Owning property through a company can further enhance tax efficiency for landlords since corporation tax rates are lower than income tax rates. This is particularly so for higher rate taxpayers.

Unfortunately it is prohibitively expensive for a landlord to transfer a property from personal ownership into a company he or she has set up. HMRC rules do not acknowledge that the ultimate owner remains the same and the transfer is treated the same as one between individuals, thus incurring stamp duty (at the higher rate for an owner-occupier landlord) and potentially capital gains tax.

Strategic Tax Planning

Embarking on tax planning in good time for the beginning of the new fiscal year is imperative. This ensures optimal use of available allowances, such as the ISA limit, and anticipates the effects of fiscal drag.

Within the intricacy of the tax rules there are opportunities to minimise what you pay. By understanding the nuances of the system and employing the right financial tools, you can better manage your tax liabilities to keep them to the minimum.

Finsbury Robinson is a full-service tax, accountancy and business advisory firm.Our  friendly and highly experienced team is available on 020 8858 4303 or via email at info@finsburyrobinson.co.ukto deal with all your inquiries