Your Year End Tax Planning

As we approach the end of the tax year, it is an important time to review your financial and taxation position. With this in mind, we have written a series of articles about those areas that may be relevant to you and which you should now review. Over the coming weeks we will take a look at everything from income tax and capital gains tax to inheritance and pensions, issues that may affect entrepreneurs and business owners and the new regime in respect of non doms. 

Overview

The most popular areas for tax planning at this time of year remain:

• Optimising your marginal income tax rate
• Pension contributions
• Gift Aid charity donations
• Gifts of assets to charity
• Income allocation
• Capital gains tax planning
• Inheritance tax planning
• Leaving or arriving in the UK

Capital gains tax and inheritance tax planning tends to be reviewed over a longer time frame.  For those contemplating leaving the UK, the optimum time to leave is before 6 April 2025.

Whilst saving tax is important in order to increase disposable income or accumulate wealth, it is only one area to consider together with:

• Making sure you have enough funds to meet your individual and business needs
• Ensuring that any investment or transaction meets your risk profile
• Maintaining financial flexibility, particularly liquidity to deal with unexpected events
• The cost and inconvenience of implementing some tax saving strategies

And whilst we are looking forward at this time of the year, the investigation activity of HMRC continues to increase so making sure that the past has been dealt with properly remains important.

The priority at this time of year must be to undertake any tax planning you had in mind and complete those transactions you can by the tax year end of 5 April 2025.  The next fiscal event, the March Budget, takes place on Wednesday 28 March this year, so there are unlikely to be any announcements of substance affecting the current tax year.

Private Clients and Private Wealth

Income Tax Planning

Your marginal income tax rate

There are a number of tax thresholds that can make a real difference to your tax liability each year.  They are:

a)   Tax free income of up to £12,570

Every individual can have tax free income up to the personal allowance of £12,570 in 2024/25.  If this allowance has not been used, consider transferring or splitting ownership of income producing assets or putting savings in joint names.  Alternatively, if your business could justify the payment of a salary to your spouse or civil partner or your children, that too would use up the personal allowance.

b)   Effective tax rate of 15% on income of £50,270

Every individual also has a basic rate band of £37,700 in 2024/25 where income is taxed at 20%.  When combined with the personal allowance, your tax liability is £7,540 on the receipt of £50,270 of income, which is a relatively low marginal tax rate of 15%.

c)   The marginal 60% income tax rate

For those individuals with incomes over £100,000, the personal allowance is withdrawn by £1 for every £2 of income over this amount.  This results in an effective 60% marginal income tax rate on incomes between £100,000 and £125,140.

If your income is in this range, you should consider taking action to reduce your taxable income such as making in year pension contributions or Gift Aid donations.

Alternatively, you may be able to either advance the receipt of income to this tax year or defer income to subsequent tax years so that you have no or little income in this income range.

Freezing of the personal allowance and the basic rate tax band

The freeze in the income tax personal allowance and the higher rate threshold until 5 April 2028 was confirmed in the Autumn Budget.  As a result, more individuals will become higher rate taxpayers if all their income does is increase at the rate of inflation.  This is often referred to as ‘fiscal drag’ as it raises more income tax without increasing income tax rates.

45% additional rate income tax

The income level at which the 45% additional rate of income tax starts to apply is £125,140.

This threshold ties in with the £12,570 personal allowance being gradually withdrawn for those with income in excess of £100,000. 

For these individuals, once their income exceeds £125,140, they will no longer be entitled to a personal allowance and will move straight into 45% income tax.

Dividend income – the 0% band

For all individuals, the first £500 of dividend income is taxed at 0%.  This dividend allowance remains £500 from 6 April 2025.

Tax on dividends

The rates of taxation on dividend income are as follows for the year 2024/25:

• the dividend ordinary rate - 8.75%
• the dividend upper rate - 33.75%
• the dividend additional rate - 39.35%.

 They will remain unchanged for 2025/26.

 As corporation tax due on directors’ overdrawn loan accounts is paid at the dividend upper rate, this will also remain at 33.75%.

Gift Aid for Charity Donations

Gift Aid remains one of the most effective ways to give money to charity and at the same time to get a tax deduction for the amount given at your marginal rate of tax.

This is therefore a valuable tax relief.  The gift is made out of the donor’s taxed income and the charity benefits by claiming basic rate tax on the value of the gift.  Higher rate taxpayers can claim 20% and additional rate taxpayers 25% in extra tax relief.

For example, on an £800 donation to charity, the grossed-up gift is £1,000 as the charity can claim back the basic rate tax of £200.  As a higher rate taxpayer, you can claim back a further £200 making the net cost to you £600.  If you are an additional rate taxpayer, you can claim back £250 making the net cost to you £550.

There is no cap on the amount which can qualify for Gift Aid relief, provided the donor has paid sufficient income tax or capital gains tax during the tax year to cover the charity’s reclaim from HMRC.

Gift Aid donations can be carried back and treated as if they were made in the previous tax year.  This can be helpful where you were a higher or additional rate taxpayer and want to reduce your tax liability in the previous tax year.

Alternatively, you may wish to carry back a donation if you did not pay enough tax in a tax year but you did in the previous year.  When you are completing your Self-Assessment tax return for a year, you can only elect to carry back contributions to that year.  The election must be made in your original tax return for the year to which you are carrying back the contributions, and before the normal Self-Assessment filing date for that year.

Gifts of Assets to Charity

Gifts of assets in specie to charity are generally more tax efficient than cash gifts under Gift Aid, particularly where the assets are standing at a gain over their original cost.

Income tax relief is available on the market value of the asset gifted to charity against your total income.  In addition, the asset is deemed to be sold at no gain or no loss such that there is no capital gains tax liability.  

Only specific types of assets qualify for this tax relief: 

• Shares or securities that are listed on a recognised stock exchange or dealt in on any designated market in the UK
• Units in an authorised unit trust
• Shares in an open-ended investment company
• An interest in an offshore fund
• A qualifying interest in land, broadly a freehold or leasehold interest in UK land.

Notable absences are unquoted shares, crypto assets and any kind of chattels.

There are three points to bear in mind in the gifting of assets as follows:

• Relief is given in the tax year of the gift - it is not possible to elect to ‘carry back’ to the previous tax year the income tax relief for the gift of a qualifying investment. 
• If the qualifying investment is standing at a loss for capital gains tax purposes, it would not be advantageous to gift it to charity as no capital loss would be recognised.  It would be advisable in this case, to dispose of the asset in the normal way, crystallising the loss for use against other or subsequent gains. The proceeds may then be gifted under the usual Gift Aid rules.
• There is no need for the donor to have paid sufficient income tax or capital gains tax during the tax year of the gift as the charity does not reclaim from HMRC the basic rate tax on the value of the assets donated.

We hope you have found the suggestions above helpful. In our next article in this series, we will be looking at capital gains tax planning.  As always, please contact us to discuss your circumstances with you.

These articles have been written to provide a general guide to potentially highly complex issues. Whilst great care has been taken in the production of these articles, they are intended to provide the clients and friends of Ritchie Phillips LLP with an outline of the issues individuals, families and trustees should consider and you should seek specific advice before taking or refraining from any action.