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Having paid your self-assessment tax liability for 2023-24 and payment on account for 2024-25 in January, with a further payment due by July 31, 2025, you could be paying too much tax. Vinku Shah explains…

The 2024-25 tax year end just a little over one and-a-half months away, so it may be a good time to review your tax position and take advantage of various tax planning opportunities to minimise your tax liability and boost your finances.

SAVINGS AND INVESTMENTS

A variety of Individual Savings Accounts (ISAs) are available and the income and capital growth within these is tax free.

·   ISA – an annual allowance of £20,000 is available to a UK resident who is over the age of 18.

·   Junior ISA – This allows for parents or grandparents to invest up to £9,000 per child on behalf of their children/grandchildren. This is also a means to transfer funds to the child while reducing your estate for inheritance tax purposes.

·   Lifetime ISA (LISA) – anyone between the ages of 18 to 39 can open a LISA to save for their first home or retirement. You can contribute £4,000 per annum until the age of 50. The government will add £1 for every £4 you put in up to a maximum of £1,000 per annum.

There are various tax efficient investments that provide tax relief, such as:

·      Venture Capital Trust (VCT) – VCT investments of £200,000 per annum can be made and qualify for tax relief at 30 per cent. Dividend income from these is tax free and there is no capital gains tax (CGT) on sale.

·      Enterprise Investment Scheme (EIS) – investments in qualifying companies up to an annual maximum of £1 million (£2million where investments over £1 million are invested in knowledge-intensive companies) attract income tax relief at 30 per cent in the year of investment with the option to carry back any unused relief to the prior tax year.

If the investment is held for more than three years than any capital gain generated is exempt provided certain conditions are met. Relief from CGT is available where an amount up to the level of the capital gain is reinvested in a company qualifying for EIS.

The original capital gain is deferred until the EIS shares are sold at which point the capital gain comes back into charge and is taxed at the prevailing rate.

·      Seed Enterprise Investment Scheme (SEIS) – You can invest up to £100,000 annually in start-ups that qualify for SEIS and get relief at 50 per cent of the investment.

Any capital gains will be exempt if the SEIS shares are held for three years. SEIS shares also provide reinvestment relief where a gain arising in the tax year on a disposal of any asset is reinvested in shares in a company on which you claimed SEIS Income Tax relief.

ALLOWANCES AND RELIEFS

Personal allowances: You are entitled to a personal allowance of £12,570 for 2024-25. This is the income you can earn before you start paying tax.  This decreases if your income is over £100,000 – for every £2 earned over £100,000, you lose £1 of your tax-free personal allowance.

Marriage allowance: If you are a basic rate taxpayer and your spouse’s level of income is below the personal allowance, they can transfer up to £1,260 of their personal allowance to you resulting in a tax saving of up to £252.

Charitable giving: If you have made any donations to UK registered charities, you will be eligible to claim relief on your tax return. Ideally, the person with the highest marginal rate of tax should be making the gift aid payments.

Savings Allowance: Basic rate taxpayers have a personal savings allowance of £1,000 for tax free interest.

For higher rate taxpayers the allowance is £500. No allowance is available for those paying tax at 45 per cent. You should structure your savings to make use of this allowance where possible.

Dividend Allowance: For 2024/2025, the first £500 of dividend income is tax free and basic rate taxpayers pay tax on dividends at 7.5 per cent and 32.5 per cent tax rate is applicable to higher rate taxpayers. You should plan your income from other sources if you are in receipt of substantial dividends from UK companies.

Pensions: All UK residents are entitled to contribute up to £3,600 gross (£2,880 net) towards pension regardless of income. No relief is available for those aged over 75.

The annual pension contribution allowance for 2024/2025 is the lower of your relevant earnings or £60,000. Any unused allowance for last 3 years can be utilised in the current tax year and therefore it is important to review your pension contributions.

Capital Gains Tax: The annual CGT allowance for 2024/2025 is £3,000. If your assets are jointly owned with another person or your spouse, you will each have your own allowance. The CGT rates have changed following the budget on 30 October 2024 and further changes take effect on 06 April 2025 therefore you may need to speak to an accountant and work out any capital gains tax due, mitigate the tax by utilising and capital losses available and plan for the payment of tax in advance.

Inheritance tax: An annual exempt amount of £3,000 per tax year (6 April to the following 5 April) may be given by an individual in assets or cash without an IHT charge.

Any unused annual exemption may be carried forward, one year only, for use in the tax year that immediately follows.

If you gift more than £3,000, you'll pay inheritance tax only if you die within seven years of giving. This is useful if you are looking to reduce the value of your estate.

Small gifts to individuals not exceeding £250 in total per tax year per recipient are exempt. The exemption cannot be used to cover part of a larger gift.

Do bear in mind that a person can only receive £3,000 worth of tax-free gifts i.e. up to the annual exemption.

SALARIES

Directors of a limited company are entitled to be paid a salary for their work and so are members of their family who work for the company.

To preserve entitlement to state pension, and to ensure the year counts as a qualifying year, it is advisable to pay a salary at least equal to the lower earnings limit for National Insurance Contributions (NIC) which is set at £123 a week for 2024/2025 i.e., £533 per month or £6,396 per annum.

Salaries may be beneficial where funds are needed in a recession for example, and the company does not have sufficient reserves to pay dividends. 

STATE PENSION

To obtain a full state pension, you need to have an NIC record containing 35 qualifying years. You will normally have an NI record for a year because you have earned a salary or self-employed profits above the de minimus level for each year.

If there are gaps in your records (say because you were not working or were working abroad) AND you don’t believe you will reach 35 qualifying years before you retire, you can fill those gaps by way of voluntary payments.

However, the time limit for how far you can go back is changing. At the moment, men born after April 5, 1951 and women born after 5 April 5, 1953 have until April 5, 2025 to pay for any eligible gaps between the tax years April 2006 and April 2016.

After April 5, 2025, this will revert to the usual six-year look back period. It is crucial that you look at your potential income level now so you can utilise the available tax allowances and reliefs to mitigate your tax liabilities.

Vinku Shah FCCA is a chartered certified accountant and partner at Silver Levene LLP. He can be contacted on 020 7383 3200 or vinku.shah@silverlevene.co.uk