With a new government and chancellor in residence at Westminster, it’s a good time to review the fresh economic landscape and consider how this may affect your personal tax situation.
Understanding tax thresholds and taxable income is key to optimising your personal tax allowances and creating a more secure financial future for you and your loved ones.
The Government published The Finance (No. 2) Act 2024 in May, confirming the 2024/25 income tax rates, including basic rate at 20%, higher rate at 40% and additional rate at 45%.
Personal tax allowances
Whether generated from employment or investments, everyone can earn a certain amount before being taxed, with three main tax allowances available for 2024/25:
- The standard income tax allowance: £12,570 p.a.
- The dividend allowance: £500 p.a.
- The savings allowance: £1,000 p.a. for basic rate taxpayers, £500 p.a. for higher rate taxpayers and nil for additional rate taxpayers.
Maximising your personal tax allowances
There are a number of ways to maximise your personal tax allowances, which are valuable when it comes to planning for your future. Here are three options to consider when looking to maximise your personal tax allowances.
Pension Contributions
In addition to offering tax relief at your marginal tax rate, pension contributions provide other valuable tax planning opportunities; for instance, if you earn over £100,000 p.a. your personal income tax allowance will reduce by £1 for every £2 of income over £100,000 p.a. This means that if you earn over £125,140 p.a. your personal allowance will reduce to zero, resulting in a marginal tax rate of over 60% on the income earned between £100,000 and £125,430.
For example, if you earn £110,000 p.a. and you make a gross pension contribution of £10,000, not only will you receive £4,000 in tax relief, but your gross income will be reduced to £100,000, so you regain your full personal allowance.
Please Note: there are rules and annual limits around pension contributions and those with income over £200,000 p.a. may face a more complex tax situation; so, it’s sensible to seek professional advice.
Charitable donations
Charitable giving enables you to help others while reducing your tax payments. A charitable contribution enables the charity to claim basic tax rates on the value of your donation.
If you are on a higher tax rate, you can reclaim the additional tax relief, which will be 20% for a higher rate taxpayer and 25% for an additional rate taxpayer. So, if you made a charitable donation of £40 donation, this is worth £50 to the charity. Then, as a higher rate taxpayer, you can reclaim tax of £10, effectively reducing the net cost of your donation to £30.
Tax Efficient Investing
As well as pension contributions, there is a wide variety of other tax-efficient investment vehicles available to UK investors, which can be used to reduce personal tax payments.
The most common is the Individual Savings Account or ISA, which remove all income or capital gains from your personal tax calculation. There are a number of options when it comes to ISA investing, including cash and stocks and shares.
Tax Planning with Tier One Capital
Tax thresholds, tax reliefs and tax rates can be challenging to navigate. At Tier One Capital Wealth Management, we have a wealth of experience when it comes to maximising your tax allowances, managing your wealth and planning for the future.
We’re here to help you create a personal financial roadmap and ensure you maximise all of the valuable tax planning opportunities available.
Conact us for unbiased, professional advice and financial planning.