Broadstreet Bulletin issue 14
Table of Contents
No Spring Budget, but…
Tax year end planning is often complicated by Spring Budgets and the timing of Easter. In 2025, neither are a concern. The Chancellor, Rachel Reeves, has repeatedly said that there will be only one fiscal event per year – an Autumn Budget – and, this year, Good Friday falls on 18 April, nearly a fortnight after the tax year ends on Saturday 5 April.
A Spring Forecast is due to be presented by the Chancellor on 26 March, but this is, currently, not expected to be accompanied by any tax measures. After the £40 billion revenue-raising Budget of last October, it would be politically close to impossible to come back for more just five months later. The Treasury has confirmed the no-extra-tax agenda, even though the projections from the Office for Budget Responsibility (OBR) are likely to show a deterioration in public finances.
In this newsletter we set out the opportunities focussed on 5 April, but also look ahead to the new tax year and future tax changes that could affect current tax planning.
Income tax
Personal allowance
The first point of call for year-end income tax planning is to check that, as far as possible, you make use of your personal allowance. This is currently a maximum of £12,570, a figure that was originally set in 2021/22 and will remain unchanged until at least 2028/29. Broadly speaking, if your income in 2024/25 exceeds £100,000 then your personal allowance is reduced by £1 for each £2 of income over that threshold. At £125,140, the starting point for additional rate tax, your personal allowance is tapered down to nil.
If you do not expect to have sufficient income to cover your personal allowance, then it may be possible to bring forward income from 2025/26, perhaps by closing a savings account and crystallising interest that would otherwise be paid after 5 April. Before doing so, make sure there are no penalties from closure, and that you can reinvest at the same interest rate.
For couples, you could consider transferring (by an outright and unconditional transfer) income-producing investments between yourselves to cover both your allowances. However, if you are not married or in a civil partnership, remember that such transfers could trigger a self-defeating capital gains tax (CGT) liability.
If you are married or in a civil partnership and one of you is a non-taxpayer and the other pays no more than basic (20%) rate tax, then you should consider claiming the marriage allowance. This allows the non-taxpayer to transfer £1,260 of their personal allowance to the taxpayer, potentially saving £252 of tax. Claims can be backdated four tax years (to 2020/21), meaning the total tax saving could be almost five times as much. Importantly:
- A claim for 2020/21 must be made by 5 April 2025.
- If the non-taxpayer has income that is within £1,260 of the personal allowance, then the claim may not be worthwhile – time for some number-crunching.
Thresholds
The income tax regime is littered with annual thresholds which it pays to be aware of:
Higher rate threshold. Once your taxable (total income less allowances and reliefs) exceeds £37,700, you are subject to higher rate tax at 40%. For dividends, the £37,700 threshold applies with the tax rate set at 33.75%.
Additional rate. 45% (and 39.35% on dividends) starts to apply at £125,140 of taxable income.
High-income child benefit charge. If you or your partner receive child benefit payments, then, if your or your partner’s adjusted net income exceeds £60,000, the partner with the highest income will suffer the high income child benefit charge (HICBC). The maximum charge is equal to the full child benefit once income exceeds £80,000, with a pro-rata charge applying between the two thresholds.
£100,000. The £100,000 adjusted net income threshold is a double trigger point:
- It is the point at which the personal allowance starts to be tapered away, creating an effective marginal income tax rate of up to 60% in the band from £100,0000 to £125,140.
- It is a cliff edge for tax-free childcare. Unlike the personal allowance, there is no tapering: exceed £100,000 by just 1p and the entire benefit disappears. The Institute for Fiscal Studies has calculated that, for a parent with two children under age three subject to average English childcare rates, once the £100,000 threshold is crossed their disposable income will not recover the resultant loss until their gross income exceeds £134,500.
HICBC: crossing the threshold
Joan lives in England and has adjusted net income of £65,000 and two children for which she claims child benefit amounting to £2,212.60 in 2024/25. If she makes a pension contribution of £5,000 gross, this will reduce her adjusted net income to £60,000 meaning:
She receives 40% tax relief on the pension contribution – £2,000 and Saves £553.15 because she is no longer subject to the HICBC, having reduced her adjusted net income to £60,000.
In effect, Joans gains 51.1% tax relief on her pension contribution.
Similarly, pension contributions can attract effective tax relief of up to 60% if they reduce the effect of personal allowance taper.
Pensions
We have already shown some of the benefits of making pension contributions in countering high marginal rates of tax. However, there are other aspects of pension contributions to review:
- 5 April 2025 (a Saturday, do not forget) is the final date for taking advantage any unused pension annual allowance (up to £40,000) dating back to 2021/22. In theory, you could contribute up to £200,000 if you have not made (or benefitted from) any pension contributions since 6 April 2021.
In practice calculating your maximum contribution can be a complex exercise, particularly if you are, or have been, a member of a final salary scheme. So, this is an area of planning that is best started ASAP.
Currently pension contributions (up to the available annual allowance) benefit from full income tax relief and, if they are made by an employer, relief from employer’s National Insurance Contributions (at 13.8%, rising to 15% from 2025/26). How long this generosity will last is regularly a pre-Budget question and, given the tightness of government finances, may be so again when autumn arrives.
While pensions are normally about the most tax-efficient way to plan for retirement, there are instances when this is not the case. For instance, the cap imposed on tax-free cash by the previous government means that, once this threshold is reached, extra contributions will only provide extra (taxable) pension. If you already have substantial pension funds, other ways to fund for retirement may be worth considering.
If estate planning is a factor for you in making pension contributions, then the proposals in the Autumn 2024 Budget need to be taken into account. Although final details are awaited, the main thrust is clear: virtually all pension death benefits will be subject to inheritance tax from 6 April 2027. Leaving a pension fund to accumulate and then be passed on to your children or grandchildren will be much less attractive than it is currently.
Carry forward
Over the last three tax years, Sophia had steadily increased her annual pension contributions from £15,000 to £25,000, although her earnings were enough to mean she could have contributed up to the full annual allowance in each year. In 2024/25, she is considering using an inheritance she has received to maximise her contributions. Her carry forward calculation is:
Tax Year | Annual allowance £ | Contributions paid £ | Amount carried forward £ |
|---|---|---|---|
Total | 80,000 | ||
2021/22 | 40,000 | 15,000 | 25,000 |
2022/23 | 40,000 | 20,000 | 20,000 |
2023/24 | 60,000 | 25,000 | 35,000 |
Before she can access any carry forward, she must use her £60,000 allowance for 2024/25, meaning her total contribution could be as high as £140,000. Following a discussion with her Broadstreet Wealth adviser, she decides to contribute £100,000 which means that, after exhausting her 2024/25 allowance:
She will mop up the unused allowance from 2021/22 before it is lost, along with £15,000 unused from the following tax year; and by limiting the contribution to £100,000, she will receive either higher or additional rate tax relief and regain her personal allowance.
ISAs
Recent Budgets have imposed extra tax burdens on investors:
The dividend allowance for 2024/25 (and 2025/26) is now just £500 – enough to cover only the average dividends from about £15,000 of UK shares.
The CGT annual exemption has similarly been reduced to £3,000 against £12,300 in 2022/23.
The personal savings allowance, worth a tax saving on interest of up to £200 for basic and higher rate taxpayers, has been left unchanged since it was first introduced in April 2016 (when the Bank of England base rate was 0.5%). Even if the allowance had been inflation-linked it would be about a third above its current level in 2025/26.
The continued tightening of the tax screw on investments, makes the tax-efficiency offered by ISAs ever more valuable. As a reminder, all ISAs have five significant tax benefits:
- Dividends are of UK income tax (but could be subject to foreign withholding tax).
- Capital gains are free of UK CGT.
- Interest earned on fixed interest securities and cash is also free of UK income tax.
- ISAs can be transferred to a surviving spouse or civil partner on death, retaining their tax freedoms until either the administration of the estate is complete, the ISA is closed, or the third anniversary of the death, whichever is sooner.
- Income and gains from ISAs do not have to be personally reported to HMRC.
The maximum total contribution to ISAs is £20,000 per tax year for 2024/25 (and all the way through to 2029/30), while, for Junior ISAs (JISAs), the maximum is £9,000. The main contribution limit was last increased in 2017 and the freeze until the next decade, announced in the Autumn 2024 Budget, is effectively another ratcheting up of investment taxation.
ISA contribution limits operate on a strict tax year basis – there is no carry forward. The message is simple: use it or lose it.
Venture capital trusts (VCTs) and enterprise investment schemes (EISs)
VCTs and EISs offer the opportunity to invest in young, small companies that require capital to grow. Both VCTs and EISs are therefore represent high risk investments and should normally only form a small part of your overall portfolio.
Subject to generous tax year-based limits, VCTs and EISs offer:
- Income tax relief at 30% on fresh investment, regardless of your personal tax rate.
- Freedom from CGT on any profits.
- For VCTs only, tax-free dividends.
- For EISs only, the opportunity to defer CGT and offset net losses against income.
The run up to the end of the tax year is prime time for VCTs and EISs to raise fresh monies. However, the nearer to 5 April you leave the investment decision, the more likely it is that the most popular offerings become over-subscribed.
National Insurance contributions (NICs)
Employers Class 1 contributions
For 2025/26 onwards, the Autumn 2024 Budget:
- Increased the rate of employer’s Class 1 NICs from 13.8% to 15.0%.
- Reduced the secondary (employer’s) threshold at which such NICs become payable from £9,100 to £5,000.
- Raised the employment allowance (effectively a NICs credit) from £5,000 to £10,500 a year.
If you are an employer, April’s rise in the NIC rate could mean savings on bringing forward payment of any bonuses currently payable after 5 April. The same logic applies if you are an owner director wanting to extract profits from your company. As a director, you should also consider the alternative of a dividend payment, which sidesteps the NICs liability but may be less tax-efficient overall because of the combined effect of income and corporation tax, as the example below shows.
Salary or dividend?
Jeff’s Berkshire-based company make profits of around £170,000 a year after paying him a salary of £72,000. He wants to extract £25,000 of those profits from his company. Any dividend would be fully taxable as his dividend allowance is already covered by his investments. In many previous years he chose a dividend rather than a bonus, but that does not make financial sense in 2025/26:
Bonus £ | Dividend £ | ||
|---|---|---|---|
Net income | 12,742 | 12,608 | 12,173 |
2024/25 | 2025/26 | 2024/25 &2025/26 | |
Gross profit | 25,000 | 25,000 | 25,000 |
Corporation tax † | N/A | N/A | (6,625) |
Employer NIC* | (3,032) | (3,261) | N/A |
Gross pay/dividend | 21,968 | 21,739 | 18,375 |
Income tax § | (8,787) | (8,696) | (6,202) |
Employee NIC | (439) | (435) | N/A |
† Marginal corporation tax rate 26.5%. in band between £50,000 and £250,000 of profits.
* The employment allowance is fully used elsewhere.
§ Income tax rate is 40% on bonus and 33.75% on dividend, assuming the £500 dividend allowance is already used elsewhere.
Class 3 NICs
If your NICs record from 2006/07 onwards has gaps, a third and almost certainly final deadline for filling in the years up to 2018/19 with voluntary contributions (usually Class 3, but in some instances Class 2) arrives on 5 April 2025. From 6 April 2025 you will only be able to fill the holes from the previous six tax years (back to 2019/20).
If your employment record is patchy, filling some of the gaps could, at the extreme, mean the difference between no state pension and nearly £66 a week.
Capital Gains Tax (CGT)
Annual exemption
The CGT annual exemption is now only £3,000 and, post the Autumn 2024 Budget, above this threshold, tax rates on gains are 18% if you are a non- or basic rate taxpayer and 24% otherwise. This means that it is more important than in past years to use your exemption by 4 April (5 April is a non-trading day). Global share markets generally rose over 2024, so you could well have some investments showing gains that can be realised to produce £3,000 of tax-free gains. If the exemption is unused, it cannot be carried forward.
If you are married or in a civil partnership, remember that you each have a £3,000 exemption. If your partner does not have sufficient gains to use their exemption, you can transfer investments to them which can then be realised with the gains set against their exemption.
Losses
If you realise a gain and a loss in the same tax year, then the loss is offset against the gain before the annual exemption is applied. To fully use your exemption, you thus need to realise gains equal to £3,000 more than your in-year losses.
If you only realise a loss, this can be carried forward to future years and is then only offset against any gain after the annual exemption is exhausted.
Just as transfers can be used to pass across gains between spouses and civil partners, so too can losses be transferred to reduce tax, as the example below shows.
A word of warning though. In transactions which involve the transfer of an asset showing a loss to a spouse or civil partner who owns other assets showing a gain, care should be taken not to fall foul of the CGT anti-avoidance rules that apply (money or assets must not return to the original owner of the asset showing the loss).
Transfer of losses
Brian has no annual exemption as it was exhausted by a July takeover of one company in which he held shares. However, he also has a shareholding in a company that was a ‘hot tip’ he picked up from a friend down the pub. He should have known better: the holding is currently standing at a £5,000 loss. His wife, Jane, took professional advice and is now looking to realise a successful investment.
To do so will mean realising gains of £5,500. If Brian transfers half his ‘hot tip’ shareholding to Jane, she can sell that alongside her investment, producing a net gain of £3,000 (£5,500 – £5,000/2) which is covered by her annual exemption.
Timing
If you incur a CGT liability in 2024/25 – other than in respect of certain residential property – your CGT will be payable on 31 January 2026. Wait until 6 April to realise the gain and the tax bill falls due on 31 January 2027 and you can use your 2025/26 annual exemption.
Inheritance tax (IHT)
The Autumn 2024 Budget contained three measures that will increase the IHT burden in the coming years:
- The nil rate band (£325,000) and the residence nil rate band (maximum £175,000) will be frozen until 5 April 2030.
- Business and agricultural reliefs are to be reformed from 6 April 2026, placing a combined cap of £1 million on 100% relief, with 50% relief applying thereafter. All qualifying AIM shareholdings will be subject to 50% relief.
- Virtually all pension death benefits will be included in the estate for IHT purposes from 6 April 2027.
The new regimes for reliefs and pensions have complicated IHT planning and, as many farmers are now realising, added to the necessity of having a long-term strategy, regularly maximising exemptions and potentially incorporating lifetime gifts and inter-spouse/inter-civil partner transfers. Some of those exemptions form the IHT element of year end planning:
- The annual exemption. Each tax year you can give away £3,000 free of IHT. If you did not use all the exemption in 2023/24, you can carry forward the unused element to this tax year (and no further), but it can only be used after you have used the current tax year’s exemption. For example, if you made no gifts in 2023/24, and you gift £5,000 in 2024/25, you will be treated as having used your full 2024/25 exemption and £2,000 from the previous tax year.
- The small gifts exemption. You can give up to £250 outright per tax year free of IHT to as many people as you wish, so long as they do not receive any part of the £3,000 exemption.
- The normal expenditure exemption. The normal expenditure exemption is potentially the most valuable of the yearly IHT exemptions, but widely ignored. Unlike the other two exemptions, it is not a multi-decade frozen cash number. Any gift, regardless of size, escapes IHT under the exemption provided that:
- it is made regularly.
- the source of the gift is your income (including ISA income but excluding investment bond and other capital withdrawals).
- the sum gifted does not reduce your standard of living.
Planning Point
Do not delay your tax year end planning. A prompt start is always useful as important data can be slow to arrive.
Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. The FCA does not regulate tax advice. This newsletter is provided strictly for general consideration only and is based on our understanding of current law, the Finance Bill 2024/25 and HM Revenue & Customs practice as at 17 February 2025. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.