2024/25 - Tax Allowances Flashcards
Personal Allowance
- £12,570
It decreases by £1 for every £2 that your net income is over £100,000.
Once you reach earnings of £125,140 per annum, your Personal Allowance is zero and you’re taxed on the full amount.
If you are near the higher or additional rate threshold, consider making pension contributions or utilising other tax-efficient investments to bring your taxable income down and potentially avoid paying the higher band of tax.
Personal Savings Allowance
The Personal Savings Allowance (PSA) is a tax
allowance that allows individuals to earn a certain
amount of interest on their savings without having
to pay tax on it. This allowance was introduced to
simplify the taxation of savings income and to
provide some tax relief to individuals with modest
savings.
Under this allowance, you can earn a certain
amount of interest from your savings without
paying any tax on it. For the 2024/25 tax year the
allowance is as follows:
Basic Rate taxpayers: £1,000 of tax-free savings
interest.
Higher Rate taxpayers: £500 of tax-free savings
interest.
Additional Rate taxpayers: No PSA; all savings
interest is subject to tax.
ISA Allowance
- £20,000
Lifetime ISA Allowance
A LISA is designed for long-term savings, specifically for purchasing your first home or saving for retirement.
Currently, you can contribute up to £4,000 per year into a LISA although this counts towards your annual overall £20,000 ISA allowance.
The government adds a 25% bonus to your
LISA contributions each year up to a maximum
of £1,000. You can open a LISA from the age of
18 and you must make your first payment into
it before you reach 40.
When you reach the age of 50, you’re no
longer able to pay into a LISA and the
government’s additional 25% will stop. Your
LISA will remain open and your savings will
continue to earn interest. When it comes to
withdrawing money from a LISA, you will incur
a 25% withdrawal charge unless you’re:
- Buying your first home (under a total of
£450,000) - Aged 60+
- Terminally ill with less than 12 months
to live
Junior ISA Allowance
A Junior ISA is intended for parents or guardians to save tax-free for their children. It operates similarly to a Stocks and
Shares ISA or a Cash ISA, but with an annual contribution limit of £9,000 for the tax year 2024/25.
It is important to note that the funds belong to
the child who take control of the ISA at age 16.
They cannot access the money until they are aged 18.
Pension Contributions - Annual Allowance
£60,000 or up to 100% of your annual earnings if this is lower than £60,000.
Pension Contributions - Carry Forward
You may be able to use the pension carry forward allowance to contribute more into your pension. This allowance allows individuals to carry forward any unused pension contribution allowance from the previous three tax years and use it in the current tax year, in addition to the standard annual allowance for pension contributions.
For example, in the 2022/23 tax year, the annual pension allowance was £40,000 but if you only contributed £25,000 that tax year then you can carry forward £15,000 to contribute to the 2024/25 tax year.
Capital Gains Tax (CGT)
CGT is a tax levied on the profits from the sale or disposal of certain types of assets that have appreciated in value. The tax is typically applied to the difference between the sale price of the asset and its original purchase price, often referred to as the “capital gain.”
The CGT allowance for the 2024/25 tax year is £3,000, this is a 50% reduction from the 2023/24 threshold of £6,000. This means that if you dispose or sell any assets such as stocks and shares, you won’t be taxed on the profits if they’re below £3,000. This is a substantial reduction from the £12,300 it was in 2022/23.
You cannot carry over any unused capital gains tax allowance to the next tax year, so if you’re planning to sell your assets, it may be worth considering doing so before the changes come into effect in the following tax year. A Financial Adviser will be able to help you maximise your CGT allowance, whilst offering advice on how to make the most of your assets.
Basic Rate: 18%
Higher Rate: 24%
Dividend Allowance
The dividend allowance is a specific tax allowance that allows individuals to receive a certain amount of dividend income without having to pay tax on it. It was introduced in April 2016 as a part of changes to the UK’s dividend taxation system.
The dividend allowance is £500 for the 2024/25 tax year. This means that anyone who receives over this amount in dividend income, will be liable to pay dividends tax at the relevant rate of their earnings.
Dividend Tax Rates
Basic Rate: 8.75%
Higher Rate: 33.75%
Additional Rate: 39.35%
Married Couples Allowance (MCA) - born pre 1935
If one or both of a couple are born before 6th April 1935, they will be eligible for married couple’s allowance.
For marriages before 5th December 2005, the husband’s income is used to work out the allowance, for marriage and civil partnerships after this date, the income is based off the highest earner.
MCA can be transferred between individuals or shared, depending on what arrangement provides the best tax reduction. If your income goes above £34,600 for 2024/25 then MCA is reduced, but it cannot reduce below the minimum allowance of £4,010 for 2024/25.
Marriage Allowance
If you’re too young to be eligible for MCA, you may be able to benefit from marriage allowance.
If you’re married or in a civil partnership, you can transfer up to £1,260 of your personal allowance to your partner. This transfer reduces a partner’s tax by up to £252 in the 2024/25 tax year.
Marriage allowance does come with conditions. You’re eligible for marriage allowance if:
- You’re married, or in a civil partnership and are not in receipt of married couple’s allowance.
- You do not pay income tax or you earn less than your personal allowance so you’re not liable to tax.
- Your partner pays tax on their income at the basic rate so is not liable to tax at the higher or additional rates. This will usually mean that your partner has an income between £12,571 and £50,270 before they receive the marriage allowance. For Scottish residents, your partner must pay the starter, basic or intermediate rate, which usually means that their income is between £12,571 and £43,662.
Marriage Allowance means the partner who earns more will get £1,260 added to their basic Personal Allowance. Of the amount of money transferred to a partner as part of Marriage Allowance, 20% is given as a reduction in their tax bill.
Inheritance Tax (IHT) Gifts Allowance
IHT is a tax that is levied on the value of a person’s estate when they pass away. The estate includes all their assets, property, money and possessions.
There is also a provision for taxing certain gifts made during a person’s lifetime. One important aspect of IHT is the “gift allowance,” which refers to the value of gifts that can be given tax-free, both during a person’s lifetime and upon their death.
Annual Exemption: You can give away gifts’ worth up to £3,000 in total each tax year without them being added to the value of your estate for inheritance tax purposes. This is known as the annual exemption.
Small Gifts Exemption: You can give small gifts of up to £250 to as many people as you like in any one tax year. These gifts are in addition to the annual exemption and won’t be included in the value of your estate.
Gifts from Surplus Income: You can give away gifts from your normal income, as long as it doesn’t affect your standard of living. These gifts are exempt from inheritance tax.
Wedding or Civil Partnership Gifts: There are specific exemptions for gifts given in consideration of marriage or civil partnership. The exemption limits vary based on the relationship to the recipient:
- Parents can gift up to £5,000
- Grandparents and great-grandparents can gift up to £2,500
- Anyone else can gift up to £1,000
Potentially Exempt Transfers (PETs): If you give away more than the annual exemption, the gift might be considered a potentially exempt transfer.
If you live for seven years after making the gift, it’s generally not counted towards your estate for inheritance tax purposes. If you pass away within the seven years, there might be tax implications depending on the value of the gift and the time elapsed.
Gifts to Spouse or Civil Partner: Gifts to your spouse or civil partner are usually exempt from inheritance tax.
Charitable Gifts: Gifts to charities and some other exempt institutions are generally free from inheritance tax.
You can carry any unused annual exemption forward to the next tax year - but only for one tax year.
Business Relief (BR)
Shares in certain companies qualify for 100% relief from IHT, meaning there is no IHT to pay on them, however you must have held the shares for at least two years prior to your death to qualify.
Provided that it qualifies, you could pass on a family company, business, unquoted shares or AIM-listed shares on your death, without being subject to an IHT charge. There’s no limit on the amount you can transfer.
All investments can go down as well as up, but investment in BR products can be more volatile and riskier than investing in larger companies and there is a greater risk of getting back less than you invested.
It is important to obtain financial advice before entering into these types of arrangements. They are not suitable for the majority of investments and maybe harder to sell.
Investing for Children
Investing on behalf of children and grandchildren is a way to give them a great start in life as well as forming part of your IHT planning. Adding money into any of these accounts will help save IHT if it is immediately exempt, or you survive seven years from the date of a potentially exempt gift.
Junior ISAs
You can invest up to £9,000 each year in a tax-efficient account for children under 18. You can invest in either a Cash Junior ISA or Stocks and Shares Junior ISA. The account is free from UK income and capital gains tax. The child can access the money from their 18th birthday.
Junior pensions
You can invest up to £2,880 into a pension each year for a child and receive 20% tax relief, bringing the total up to £3,600.
This can grow free of UK tax and will only be accessible from age 55 (57 from 2028) or possibly later if the rules on pension access change in the future.
The Financial Conduct Authority does not regulate Trust or Tax Planning. The value of tax reliefs depends on your individual circumstances and may change in the future.
Life Insurance
Normally, you would look at this option, once you have exhausted the other means of reducing or removing any liability, and therefore provider cover based on the estimated outstanding amount or tax to pay.
For a single person this would be a single life policy and for a couple who are married or in a civil partnership and plan to leave everything to each other on first death, this would be a joint life second death whole of life policy. In both instances it would be written in trust for the benefit of those who will eventually inherit the estate.
A whole of life policy is designed to remain in force until the death of the people who are insured, whenever that pay be, and pay out the sum assured of the policy at that point in time.
There are different options for whole of life policies, including those with reviewable premiums and the ability to include an investment element.
The more commonly used options will be a policy with guaranteed premiums, as this will provide you with certainty over the cost of the policy over time.
The premiums for the policy may be quite high depending on the level of cover you require. Depending on the cost, it may not be possible to cover the full liability and depending on your circumstances and other planning you have in place, your estate may increase in value over time leaving a shortfall in cover.
The cost of the premiums will reduce the value of your estate, but their treatment may depend on your circumstances.
If you are able to pay them out of your normal income, then they would sit within your normal expenditure allowance. If you fund the premiums from capital, you can either use your annual gifting allowance, or they would be classed as either a potentially exempt transfer or chargeable lifetime transfer, depending on the type of trust arranged.
For pure life insurance contracts premium paid is for the cover itself and rarely has any cash in value.
Trusts and Pensions
Trusts can be used to help you save tax and keep control of your assets. You pick the trustees (which can include yourself) who will make decisions like when, and to who, the trust is distributed. You can make gifts into a trust, which are held there until the trustee decides it’s time for someone to receive them. The benefit of doing this is so that you can stay in control.
The most commonly used trusts are Discretionary trusts and Bare trusts. Bare trusts (also known as absolute trusts) are the simplest type and are usually set up for a child with one or two adults acting as trustees. The beneficiaries are nominated at outset and cannot be changed. Once they reach 18 (or 16 in Scotland) they are entitled to the trust assets.
With a Discretionary trust, you, or the people you’ve appointed as trustees, are in control of the money until it is handed over. You can choose who benefits, when and by how much and the money is normally protected from divorce and bankruptcy.
With any trust, the trustees decide where to invest the money and normally any growth or interest will sit outside your estate so you can’t benefit from it. The seven-year time frame mentioned elsewhere in this guide starts from the point the money is paid into the trust.
Two other trusts which are commonly used as part of IHT planning are Discounted Gift trusts and Loan trusts.
Discounted Gift
A Discounted Gift trust provides an immediate IHT saving along with a regular income.
- A gift is made into the trust, usually of £100,000 or more
- The gift is split into two parts
- The first part is treated as a gift and will fall out of the estate after 7 years
- The second part (the discount) is used to provide income to the investor for life, and is immediately tax free
- The amount of the discount is based on the age and health of the investor
- The longer you’re expected to live, the greater the discount and the larger the immediate IHT saving
Loan Trust
A Loan trust slows down the growth of the value of an estate and the amount of IHT.
- You loan money to a trust, which is invested
- As it is a loan, you can get full or partial repayment at any time
- The outstanding loan amount is always part of your estate
- But any growth sits outside and is IHT free
- The loan is set up interest free and regular payments can be made
Pensions with regard to IHT
Pensions will normally fall outside of the estate; you can name as many beneficiaries as you like and there is no IHT for them to pay. If you die before age 75 your beneficiaries can usually withdraw what they like from your pension without paying tax.
If you chose to receive an annuity which is paid to a beneficiary after your death, those payments could also be tax free. If you die age 75 or older, withdrawals will be taxed at the beneficiaries’ marginal rate of tax.
