Are you prepared for the new tax year?
Learn how to make your savings and investments tax efficient by taking advantage of every available allowance and exemption.
In a positive move in his Spring Budget, Chancellor Jeremy Hunt reduced employee National Insurance contributions for the second time this year. However, with tax thresholds frozen, many people may find themselves moving into a higher tax band and having to pay more tax.
It has been forecasted that the living standards, measured by the real household disposable income per person, will be 3.5% lower in 2024-25 than their pre-pandemic level. This is the biggest decrease in real living standards since the 1950s, as stated by the Office for Budget Responsibility. With a general election potentially happening in November, economic performance and cost of living pressure will be critical topics. Therefore, taking advantage of all the available tax breaks will help secure your short and long-term financial stability.*
Personal Allowance
For the 2024/25 tax year, there are no changes to the personal allowance, which is the income you don’t have to pay taxes on and remains at £12,570. The basic tax rate also remains at 20%, and the higher-rate threshold, at which you start paying 40%, is £50,270. The additional-rate tax threshold, at which you pay 45%, also remains at £125,140. These rates will be frozen until 2028.
National Insurance
The good news is that the main Employee National Insurance contributions (NICs) rate has been reduced by a further 2% in the Spring Budget, which is now a permanent change. This means that most employees will now pay Class 1 National Insurance at a rate of 8%, while self-employed earners will pay class 4 contributions of 6%. Class 2 NICs have been abolished.
Dividend and savings income
There have also been some changes to dividend and savings income. Basic-rate taxpayers can continue to earn £1,000 in interest on their savings before paying tax in 2024/25 through the personal savings allowance. However, the allowance remains at £500 for higher-rate taxpayers, and for additional-rate taxpayers, it is zero.
The dividend allowance has decreased by 50% to £500 for the 2024/25 tax year, which is a significant change. If you own shares in a company or receive dividends from funds or investment trusts, this will likely affect you. Tax rates on dividends above the allowance for 2024/25 have also changed.
Due to changes in dividend tax, it might be a good idea to discuss your options regarding the more generous continuing tax allowances for ISAs and pensions. We are always happy to review your plans and goals to help you make the right decision.
Personal pensions
This tax year, the significant changes announced in 2023 regarding the lifetime allowance will be implemented. From now on, there will be no limit on how much one can accumulate in their pension, and the Lifetime Allowance will no longer exist.
It is excellent news if you’re saving towards retirement or already accessing your pension pot. The standard annual allowance for pension contributions remains at £60,000, which is the maximum total pension contribution you, your employer, or a third party can make and receive full benefits of tax relief in a year.
Tax relief on personal contributions is limited to either up to 100% of your relevant earnings in the tax year or £3,600 if you earn less than this. If you’re saving for your retirement, you now have the opportunity, if financially viable, to increase the amount you can pay into your pension pot each year and still benefit from the generous tax allowances associated with pensions.
However, there is a catch. The government has capped the tax-free lump sum you can withdraw from your pension at £268,275 or 25% of your actual pension pot, whichever is lower. After this amount, any withdrawal from your pension will be subject to Income Tax at your marginal rates. So, saving as much as you can afford in tax-efficient accounts, such as ISAs and pensions, is essential.
Need help with the new tax year?
Our advisers are here to help you with all aspects of your finances.
ISAs
It is important to note that your tax-efficient ISA allowance for 2024/25 remains at £20,000, applicable to both Stocks & Shares ISAs and cash ISAs. However, a new type of ISA is under consideration, called the British or UK Stocks and Shares ISA. This proposal is currently open for consultation until June 2024.
If approved, this new ISA will allow you to save an extra £5,000 per year tax-efficiently into the account, in addition to your existing £20,000 ISA allowance. This ISA has been designed to encourage investment in British companies.
While interest rates are still high, they are expected to remain below inflation for most of 2024. According to the OBR, inflation is not predicted to fall to 2% until early 2025. This means that the spending power of savings in Cash ISAs or cash accounts will continue to erode, as they cannot grow as fast as prices rise. On the other hand, investing in Stocks and Shares ISAs has the potential to achieve better long-term results for ISA savers.
Junior ISAs
Junior ISA annual allowance remains the same at £9,000. It is a great way to give your children or grandchildren a financial head start, alongside children’s pensions. Junior ISAs have a higher chance of growing long-term since the money cannot be accessed until the child is 18. If you open a Junior Stocks and Shares ISA for them, it can be even more beneficial.
A Junior ISA must be opened by a parent of legal guardian, but after that anyone can contribute.
Inheritance Tax
Rumours about Inheritance Tax have circulated around the Spring Budget, but nothing has changed. The Inheritance Tax (IHT) nil-rate band for 2024/25 remains the same at £325,000. It will be frozen until 2028. The additional Residence Nil-Rate Band (RNRB) remains fixed at £175,000. This means that your main residence can pass to direct lineal descendants.
In the last two tax years, the tax-free allowance for capital gains tax has been reduced from £12,300 to £6,000. From April 2024, the amount of money you can make before starting to pay tax, known as the CGT allowance, drops to £3,000.
Capital Gains Tax
It’s worth noting that there is a small positive change for those looking to sell a second home or buy-to-let property. In the new tax year, the CGT allowance for disposing of a property asset that isn’t your main residence will decrease from 28% to 24%.
Corporation Tax
No changes are proposed to the rates of Corporation Tax. For the 2024/25 tax year, the tax will remain at 19% on profits up to £50,000, 25% for profits over £250,000, and an effective rate of 26.5% for profits that fall between those two thresholds.
If you have any questions, do not hesitate to call us. This past year has been challenging in many ways, so it’s always wise to seek financial advice to ensure your finances are in good shape as we enter a new tax year. It’s also a good time to review your family’s finances and goals in light of the current landscape.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
Please note that investing in a Stocks & Shares ISA does not offer the same level of capital security as a Cash ISA or a deposit with a bank or building society.
Please be aware that the levels and bases of taxation, as well as the reliefs from taxation, may change at any time and are generally dependent on individual circumstances.
Please note that Cash ISAs are unavailable through St. James’s Place
Sources
*Economic and fiscal outlook, Office for Budget Responsibility, November 2023 accessed March 2024
Approved by SJP 01/05/2024
