Tax Planning for Individuals
2024-25
Fiscal drag – freezing tax allowances
As announced in the Autumn Statement 2022, most of the personal tax and NIC rates and allowances are to be frozen at current levels for a further two years until April 2028.
Note: The Chancellor did not change this strategy in the Spring Budget 2024 or the Autumn Statement 2025.
This does mean that most pay increases in the next six years will be taxable. If these pay increases are less than inflation, then take home pay is going to suffer on two counts. Any pay rise at less than the rate of inflation will result in less household spending power, as will the impact of any extra tax paid on the pay increase received.
If you can afford to manage on existing take-home pay you could direct any pay increases into additional pension contributions, which would be tax-free if kept within the increased annual allowance of £60,000 (previously £40,000).
Income Tax – Avoiding Marginal Rates
What are these marginal rates?
Most of us know that income tax is charged at three main rates: 20%, 40% and 45%.
Unfortunately, there are certain levels of income that trigger a loss of benefits or allowances as well as a charge to income tax. Because of this, the percentage rate of tax charged can be higher than the underlying rate of income tax.
For example: Joe’s taxable earnings have always been under £100,000, however, for 2024-25 Joe estimates that his income will be £125,140. Bad news…
As soon as income for tax purposes exceeds £100,000 Joe loses part of his tax personal allowance (£12,570 for 2024-25). In fact, for every £2 that his income exceeds £100,000 he will lose £1 of this allowance. This means that as soon as income is equal to or higher than £125,140 the personal tax allowance is no longer available. Taking this into account, Joe’s tax bill on the top £25,140 of his income is 40% (£10,056) plus, 40% of the lost allowance – a further £5,028. In total, Joe retains just £10,056 of his £25,140 income (£25,140 – £10,056 – £5,028). His percentage tax charge is therefore 60% on this marginal band of income between £100,000 and £125,140.
Similar marginal rates apply if:
your income moves above the threshold where working tax or child tax credits cease to be available,
- a higher paid parent’s income tops £60,000 at which point child benefits would be under threat, or
- those with incomes in excess of £125,140, paying income tax at 45%, will find the tax relief they can claim for pension contributions will be reduced.
To avoid or lessen the impact of these marginal rate charges you will need to discuss the possibility of reducing your income below the trigger points. There are various strategies that can be employed to achieve this including the sacrifice of salary for non-tax benefits such as increased employer pension contributions or longer holidays. However, since April 2017, HMRC have used new legislation to counter these salary sacrifice arrangements and so it is doubly important to consider options with care.