Simple ways to reduce your tax bill in 2024/25

The age old saying, ‘there are only two things certain in life, death and taxes.’ Well, although we may not always be able to control the former, the good news is we can have greater control on the amount of tax we pay to ensure we are being as tax efficient as possible. Regardless of your age, there are different ways in which you can reduce the amount of money you pay in tax . So, here is a useful refresher on simple ways in which you can save money on your tax bill in the new 2024/25 tax-year (commencing 6th April 2024 through to 5th April 2025).

Income Tax

Income tax is the tax payable on any personal income we receive in a given tax year. This includes any interest received on savings deposits, as well as tax levied on salaries for employed people, or profits for the self-employed.

In England, Wales and Ireland, income tax is levied at 20%, 40% and 45% for basic, higher and additional rate taxpayers respectively. Different rates and tiers apply in Scotland, with 6 tiers of income tax bandings. Here, we will be specifically looking at England, Wales and Ireland. 
There are various complexities relating to the personal allowance, however, broadly speaking, you have a personal allowance each tax year, currently £12,570 (frozen until April 2028). Up to this amount, earnings are tax-free. Surplus earnings above this amount are taxed at your marginal rate. It should also be noted that for every £2 you earn over £100,000, your personal allowance decreases by £1. Therefore, the personal allowance is zero if your income is £125,140 or above.

Relating specifically to cash deposits, there is a separate allowance called the personal savings allowance (PSA) which is £1,000 and £500 for basic and higher rate taxpayers respectively. This is used to offset against any interest accrued on our cash savings. Unfortunately, additional rate taxpayers are not entitled to this allowance. 

Capital Gains Tax

Capital Gains tax (CGT) is the tax you pay upon the disposal of an asset that has increased in value. These might include the selling of stocks and shares, personal chattels and more. In the 2024/25 tax year, the annual exempt amount has been reduced from £6,000 to £3,000.

The Annual Exempt Amount is the amount you can use to offset against any CGT liability you may incur within that given tax year.  Any CGT liability in excess of the annual exempt amount (£3,000), will be taxable at either 10% or 20% depending on if you are a basic rate or higher/additional rate taxpayer.

When disposing of property however, the associated tax is levied at 18% and 28% for basic and higher/additional rate taxpayers respectively. This is not applicable to your primary residence, but to additional properties such as a buy-to-let property of a second home.

Dividend Tax

When investing in stocks and shares of public companies, dividends are usually paid (which is a portion of the company profits distributed to shareholders) on a regular basis (monthly, quarterly, annually etc). There is a tax levied on dividends received - at the rate of 8.75%, 33.75% and 39.35% for basic, higher and additional rate taxpayers respectively.

Each tax year, similar to the annual exempt amount, you have a dividend allowance which is currently a measly £500. This can be offset against dividends received in the 2024/25 tax year, where any excess above the dividend allowance is taxed at their respective rates. 

Maximising Tax-Efficiency

Now we have discussed taxes which many of us pay, lets discuss the various ways in which you can help prevent your hard-earned money from going to the tax man!

Utilising ISA Allowances

This is a commonly thought-of solution to investing in a tax-efficient manner. Let’s explore how it works:

• Each tax year you are able to invest an amount into an Individual Savings Account (ISA), currently £20,000. For children aged under 18, they have a Junior ISA (JISA) available to them which currently provides an allowance of £9,000 per tax year.
• Monies held within an ISA can be deposited in cash and/or invested in stocks and shares  
• ISAs receive tax-free growth and income.

What does this mean for you?

It means each tax year; you have £20,000 to invest into an ISA. Upon disposal of assets within the ISA, there is no CGT liability generated which saves you money if you continue to utilise your ISA allowances over the long-term. This can avoid an unpleasant tax bill if your investments perform well and generate a capital gain. In addition, if you hold a Stocks and Shares ISA with regular receipt of dividends from the underlying companies, you do not need to worry about any form of dividend tax liability. With the dividend allowance being a measly £500, this could be a crucial difference between generating a sizable tax bill.

If you hold a cash ISA, it also means you do not need to pay income tax on the interest received on the deposit accounts you are holding within the ISA wrapper. Given the increase in savings rates in recent years, especially the high rates which are being offered on some fixed term accounts (see more at Savings Champion), it is considerably easy to accumulate interest in excess of your personal savings allowances than it would have been before rates started to climb.

Making additional Pension contributions

Each tax year, you can tax efficiently contribute into a registered pension scheme the maximum of either £3,600 (gross) or 100% of your relevant UK earnings, up to the annual allowance, currently £60,000 (gross), providing tax relief at your marginal rate. This means if you’re a 20%, 40% or 45% taxpayer, you may be able to claim tax relief, matching your personal tax band, on contributions made up to the annual allowance.  There is also an opportunity for further pension contributions in excess of the annual allowance through a carry-forward rule. This allows up to a maximum of 3 previous tax year unused allowances to be used.  

Please note: If you are a high earner, then your annual allowance may be subject to tapering. If you are unsure or believe you are in this position, you should speak to your adviser. 
To encourage savings for retirement, the Government pays tax relief on the allowable contributions you make. This means that your pension provider can claim tax back from HMRC and add that amount to each contribution you make. Tax relief can be claimed through various ways such as the net pay arrangement, relief at source or salary sacrifice.

Pension savings are typically free to grow without generating any form of tax liability.  Furthermore, when you begin drawing down on your pension, typically 25% of the pension pot will be paid tax-free, with the remaining amount being taxable at your marginal rate.

All the above-mentioned points mean that contributing into our pension can be extremely tax efficient.

For those who have relevant earnings above £100,000, there could be further benefit to contributing considerable amounts into your pension as you could be paying an effective rate of up to 60% income tax. 

How does it work?

• As mentioned before, we all receive a personal allowance of £12,570. For earnings above £100,000, this personal allowance tapers by a rate of £2 per £1 over £100,000. 
• This means you can earn £125,140 before completely losing any entitlement to the personal allowance. 
• However, if you were to contribute into a pension, it reduces your taxable income and therefore, you can begin to reclaim your personal allowance. 

Case Study example:

Sally, has relevant UK earnings of £120,000 and as a result, is a higher rate taxpayer. Due to her high salary, she only has a personal allowance of £2,570 (£20,000 earnings over £100,000. Therefore £20,000 / 2 = £10,000 of personal allowance lost. Personal allowance = £12,570 - £10,000 = £2,570).

Sally has decided it is affordable for her to make a gross pension contribution of £20,000 that tax year. As a result, not only has she successfully managed to reclaim her full personal allowance by lowering her taxable income.  In doing so, Sally has also contributed to a tax efficient investment vehicle, obtained 40% tax relief from the government, all of which is able to grow tax free for her retirement provision.  

As with all things, there comes a downside to specific strategies in saving tax. An example of this would be that you can only access your pension from age 55, increasing to 57 in 2028, as per the normal minimum pension age. There may be exceptions for those in critical illness or for the terminally ill. It is important to ensure affordability of pension contributions due to the inaccessibility of the investments. You should speak to a financial adviser when contemplating aspects of your retirement including affordability of a pension contribution.  

Use it or lose it – Utilising all allowances in the household

As mentioned above, we have discussed the main types of tax which people might be liable to pay, including Capital Gains Tax, Dividend Allowance, Personal Allowance and the Personal Savings Allowance.

At the end of the tax year, these allowances will be reset, whether you have used them or not and most cannot be carried forward. As such, to help maximise tax efficiency, it is also worthwhile to consider the allowances available as a household and not just on an individual basis.

If you have utilised your current years allowances, there may be someone in your household who has not. In this instance, funding their contributions or allowances might be a useful way to spread the tax liability across multiple people to maximise tax efficiency. 

Case Study example:

Rebecca, age 45, earns £185,000 per annum while her husband, David, earns £20,000. They have two children, James and Josh. Rebecca has currently utilised all her allowances in a tax-efficient manner as well as maximised her pension contributions for the current tax-year – however the remainder of her family have not. Rebecca holds some cash and some shares which are outside of her ISA and Pension. David has also contributed an affordable amount to his workplace pension arrangement to claim basic-rate tax relief. 

Rebecca could:

• Gift some of the shares to her husband, David, if she believes that the gain on these assets is likely to generate a capital gain in excess of £3,000. Between them, they have £6,000 allowance to use.
• Minimise her cash holdings and maximise David’s cash holdings, as Rebecca does not have any personal savings allowance to offset against any interest earned as she is an additional rate taxpayer.
• Contribute £3,600 into each of her children’s pensions as well as £9,000 into their JISAs to utilise their current allowances.
• Contribute to David's pension on his behalf if affordable. Knowing how much is affordable should be done with the assistance of a financial adviser.
• Gift £20,000 to David for him to make an ISA contribution in the current tax year, if affordable. 

The culmination of utilising your own allowances as well as your loved one's allowances, can be a great way for high earners to maximise their own tax efficiency as well as their families.

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

Investment returns are not guaranteed, and you may get back less than you originally invested. 

Tax rates and allowances mentioned in this article are based upon current limits and allowances, but are subject to change.

The Financial Conduct Authority (FCA) does not regulate cash flow planning or tax advice.

Savings Champion and their associated services are not regulated by the Financial Conduct Authority (FCA).