With the arrival of a new Government, all eyes are focused on what we might expect from Sir Keir Starmer and his newly chosen cabinet. The new Chancellor, Rachel Reeves, has announced that there will be a Budget this year, although with the required ten weeks' notice it is unlikely we will see anything until at least mid-September at the very earliest. 

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It has been suggested that Labour, at this point, have been ‘light’ on the details of what we may expect and there continues to be some concerns around possible changes to pensions , although for now we can be assured that the Lifetime Allowance will not be reinstated as was confirmed earlier this year. However, Labour have confirmed they are planning a full ‘pension review’, so w e have to wait and see what may materialise. 

The current state of play sees us with an increasing tax burden. From a reduced Dividend allowance, falling to £500 - just 25% of the allowance from two tax years ago - to the Capital Gains Tax (CGT) allowance that has reduced from £12,300 to £3,000 over the same time period. We have also seen a freeze in the Savings and Inheritance Tax (IHT) allowances and no increase in the personal income tax bands in England and Wales for years. 

Following a prolonged period of strong wage growth, more and more individuals are pushed into a higher income tax bracket, wiping out much of the value of higher salaries. This is made worse with reduction in the level at which you fall into the additional rate tax band of 45%, falling from £150,000 to £125,140 in April 2023. 

It is suggested that the freeze on allowances is likely to remain, but with this increased tax burden, tax relief on pensions is still the one major perk which has not yet been raided. Will this all change later in the year following a Budget? We will have to wait and see. The advice so far is you can only work with the information you know today, so now is a good time to utilise this benefit, especially if we may see a change in the near future. 

Take advantage of the ‘tax giveaway’ 

The tax relief you gain from contributing to your pension is effectively a ‘tax giveaway’. The tax relief granted on pension contributions is relevant to the level of tax you pay on your income. In real terms, for every £1 a higher rate taxpayer puts into their pension, they effectively only pay 60 pence for that £1 contribution due to the 40% tax relief it would attract. Whereas, an additional rate taxpayer will pay 55 pence for every £1 contribution, as a 45% taxpayer. A basic rate taxpayer therefore pays 80 pence for a £1 contribution. 

For example, Sally is a higher rate taxpayer earning £95,000 per annum from her full-time employment. She currently makes no employee pension contributions but has surplus income at the end of each month and wants to ensure that she saves this money efficiently for her future. If Sally were to make a £20,000 net contribution into her pension, HMRC would top up her contribution by 20% at the outset (via a method called Tax Relief at Source) meaning a total of £25,000 is invested in her pension. As a higher rate taxpayer, paying 40% tax, Sally would be able to complete a self-assessment tax return to claim a further 20% tax relief. Meaning that her pension contribution of £25,000 gross would have only cost her £15,000. Bear in mind, if you do not apply for the additional tax relief, you will not receive it. Therefore, it is vital you remember to include it on your self-assessment tax return.

For those tipping into a higher tax band, there is an additional benefit as you can offset your income tax and avoid being dragged into a higher rate tax bracket. 

Under current legislation, any money invested within a pension can grow free of Capital Gains Tax, making a pension contribution the most profitable and the most tax efficient way of saving for your future. Furthermore, the annual pension allowance was increased this year from £40,000 to £60,000, allowing higher and additional rate taxpayers to save more per year to make the most of the tax relief available. 

What happens when you drawdown on your pension? 

Sadly though, it’s not all good news. As you begin to drawdown on your pension wealth, there are a few things to consider. Firstly, the money you invest within your pension is ‘locked away’ until age 55 (if you joined a scheme before 4th November 2021 and had an unqualified right to retire at 55) or age 57 (if you joined a scheme after 4th November 2021). Current pension legislation with most modern pension arrangements means you can draw up to the greater of 25% of your pension, or £268,275 tax free (the new cash lump sum allowance). When you draw upon the remaining amount of pension wealth, you will be taxed at your marginal rate of income tax. 

If you feel that you are not making the most of your tax allowances, get in touch with a member of our team at The Private Office to arrange a free initial financial consultation.

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

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

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

As expected, Keir Starmer’s Labour party have won the 2024 General Election with a landslide victory, but what could this mean for your finances and when will any changes be implemented?

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Taxation

In terms of taxation, the introduction of VAT on Private School fees is expected, though there will likely be complexities around the implementation of this change.  Beyond this, the Labour Party have said they will not increase taxes on ‘working people’, indicating income tax, national insurance and VAT are unlikely to increase in the short term, though it is understood Labour will retain the Conservative Party’s plans to freeze income tax thresholds until at least 2028.  However, there has been no such pledges in respect of capital gains tax or inheritance tax, so these are areas Starmer’s new government may look at.

Pensions

Regarding pensions, the subject of reintroducing the Lifetime Allowance (LTA) for Pensions has been a hot topic since it was announced in the 2023 Spring Budget that the LTA was to be abolished.  At the time, Labour pledged to reintroduce the LTA, but it is difficult to see how this could be implemented in practical terms given the abolition has now taken place and additionally, Labour are keen not to disincentivise Doctors who have reached the limit from working.  Labour have now indicated they will in fact not reintroduce the LTA, but they have pledged to conduct a detailed review of pensions, so it will be interesting to see the outcome of this review, specifically whether there will be any changes to tax relief on pension contributions, the taxation of pension death benefits or the 25% tax free lump sum.

When might changes be implemented?

In terms of a timeframe for any changes to be implemented, Labour have committed to including a forecast from the Office for Budget Responsibility (OBR) in their first budget, as they look to distance themselves from the approach taken by Liz Truss, who famously did not utilise the OBR’s analysis ahead of her disastrous “mini-budget” in September 2022. Given the OBR require 10 weeks’ notice to provide their forecast, the Budget is therefore unlikely to be delivered before mid-September 2024.

If you would like to discuss the implications of the new government for your finances, please get in touch to arrange a free consultation with one of our Independent Financial Advisers.

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The opinions shared in this article are solely those of the individual and they do not necessarily reflect those of The Private Office.

Please note: This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. The Financial Conduct Authority (FCA) does not regulate tax advice. Investment returns are not guaranteed, and you may get back less than you originally invested.

According to the Office for National Statistics, in 2023 to 2024 it has been estimated that almost 6.5 million people are paying higher or additional rate tax, a figure that has risen year on year and will likely continue in this fashion. This is mainly due to the 5-year freeze on allowances announced in the Budget 2021 and was extended for a further two years until April 2028 following the updates in the 2022 Autumn Statement.

Added to this, the Chancellor announced in the Spring Budget of 2023, that the amount you can earn before paying additional rate tax would be lowered, from £150,000 to £125,140 from April 2023, meaning even more people are dragged into the highest income tax bracket. Furthermore, the annual Capital Gains Tax exemption has fallen from £6,000 to £3,000 per person, per year and the tax-free Dividend allowance has fallen from £1,000 to £500. This creates a larger tax burden on all individuals and impacts the amount of tax planning each person should undertake.

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Tax can have a big impact on your ability to preserve the value of your savings and investments in retirement. As such, one of the main focuses when advising clients, is creating a plan that helps them achieve their objectives in the most tax efficient manner. There are several ways to reduce the tax you pay on your annual income, especially if you’re in the higher or additional rate tax bracket.

What are the main taxes?

Income tax

Income tax is a tax imposed directly on your personal income. In simple terms, income tax is the tax on your earnings and is paid at 0% - 45% dependent on which of the income tax brackets you fall into.

Once your earnings exceed your personal allowance, you are required to pay tax on the following sources of income:

1. Income from employment
2. Income from pension
3. Interest on savings
4. Rental income
5. Employment benefits
6. Income from a trust

Capital Gains Tax

Capital gains tax is a tax on the profit made when you dispose of an asset such as an investment in an unwrapped environment (for example a direct share or general investment account) or any properties (other than the main residence).

The amount of capital gains tax you would pay on stocks and shares depends on the tax bracket the gains fall into when added on top of the income with any gains being taxed at either 10% (basic rate) or 20% (higher/additional rate), after taking into account the newly reduced (tax year 2024/25) capital gains tax allowance of £3,000. For the sale of property outside the main residence, the gains are taxed either 18% (basic rate) or 24% (higher/additional rate).

Inheritance Tax

Inheritance tax is a tax levied on any possession that falls in the individual's estate upon death. This tax can also apply to gifts made while the individual was still alive.

Inheritance tax is typically set at 40%, but if at least 10% of your estate is left to charity, the tax rate reduces to 36%.

An individual can leave up to a total of £325,000 (comprising of money, property, and possessions) without incurring inheritance tax. Additionally, an extra £175,000 allowance may apply if the main residence is passed on to direct descendants.

Why is tax planning important?

Tax planning involves minimising tax liabilities by utilising allowances, exclusions, exemptions and deductions to reduce owed taxes, so it should be an essential part of an individual’s financial plan.

Effective tax planning can be instrumental in savings individuals' money, maximising wealth and attaining your financial goals. By proactively managing finances, optimising tax liabilities and enhancing your overall financial wellbeing, individuals can ensure they are on track to meet their objectives.

What is higher rate tax?

In the UK, we do not get taxed on the first £12,570 we earn from our salary, bonuses, rental income, pensions, and other various income types - this is called our Personal Allowance. Income exceeding the Personal Allowance is then subject to income tax. This is banded so:

• Your earnings between £12,570 and £50,270 are currently taxed at the basic rate of 20%.
• Earnings from £50,271 and £125,140 at the higher rate of 40%.
• Anything above £125,140 is taxed at an additional rate of 45%.

The personal allowance and the higher rate threshold (£50,270) have been frozen until 2028 following an announcement by the Chancellor in the Autumn Statement 2022.

Although the rate of inflation is decreasing month on month, currently standing at 2.30% in June 2024, we have seen rates over the past year far exceeding the Bank of England’s 2% target rate, resulting in an increase for wages for individuals across the UK. Therefore, more people are and will continue to join the population previously pulled into paying 40%-45% tax on their earnings, so it is increasingly important we utilise the tax planning opportunities available to us to minimise the impact of the frozen tax allowances and tax bands.

Ways to reduce your income tax bill

There are a few ways in which you can negate the impact that your income tax bill can have. Broadly, they are as follows:

Contribute to your pension

Contributions to a pension are usually made from taxed money (unless in a 'net pay' scheme). However, when you pay in, you will pay the “net” amount (80% for a basic rate taxpayer). The government will then make up the tax paid on the amount contributed, effectively making the contribution itself, tax-free.
For example, if you’re a basic rate taxpayer you can receive tax relief of 20% from the government, therefore it costs you 80p to make a £1 pension contribution.

Contribute to your pension via salary sacrifice

You can ask your employer to enter into a salary sacrifice contribution arrangement to your pension, which will reduce the amount of money subjected to the highest rate of income tax (or various rates depending on the tax bands the income falls into after the sacrifice), along with also providing valuable National Insurance savings. This can become quite complicated, and more details can be found on the government website.

A notable additional benefit of salary sacrifice arrangements is that depending on your employer, they may pay the National Insurance Contributions savings they make from the forgone salary into your pension.

Make full use of your annual allowance

The great news is the Government have increased the amount that you can contribute into a pension each year, without suffering a tax charge. The maximum annual allowance has risen from £40,000 to £60,000, implemented at the beginning of the 2023/24 tax year. 
If you are not subject to tapering of your annual allowance and you have not utilised your full allowance of £60,000, then you could consider making use of the full allowance from a personal contribution, or carrying-forward unused annual allowance from previous years. Please note, however, this can only be done up to a maximum of the three previous tax years and personal tax-relievable contributions are capped at 100% relevant UK earnings regardless of the amount of unused annual allowance.

Up to 60% tax relief available when you invest in a Pension

Investing in your pension pot is an attractive option to increase your savings in a tax efficient way. We actively encourage clients, when suitable, to contribute regular amounts to their pension to not only build up their pension pot but also to benefit from tax efficiencies.

For those earning between £100,000 and £125,140 you could be in the 60% tax trap. But this also presents an opportunity when it comes to saving for retirement. If you have taxable income in this range, you can effectively receive income tax relief of 60% on your pension contributions as this is the marginal rate of tax paid on earnings within this band. This is due to the impact of your personal tax allowance of £12,570 being reduced by £1 for every £2 you earn over £100,000 meaning the allowance is reduced to zero when your income reaches £125,140. A pension contribution within this band of earnings effectively reclaims part, or all, of your personal allowance thus increasing the rate of tax relief to 60%.

How to avoid the High Income Child Benefit Charge

An individual can receive Child Benefit if they are responsible for raising a child who is either under 16 or under 20 if they stay in approved education or training. There are two rates at which it is paid; for the first/eldest child, you will receive £25.60 per week and for any additional children, you will receive £16.95 per week per child.
If you are a couple claiming Child Benefit, where one or both individuals have an income above £60,000 per annum, or someone else claims Child Benefit for a child living with you and they contribute at least an equal amount towards the child’s upkeep, you may have to pay a tax charge. This is known as the ‘High Income Child Benefit Charge’.
The tax charge is calculated through the tax return on any partner whose income is more than £60,000 a year. In the event that both partners have incomes over £60,000, the charge will apply to the partner with the higher income. The tax charge will be one percent of the amount of Child Benefit received for every £200 of excess income, meaning that the Child Benefit is completely removed when income reaches £80,000.
One way you may avoid the tax charge is if a personal pension contribution is made, as the adjusted net income used by HMRC will reduce. If the contribution is enough to reduce this to below £60,000, the High Income Child Benefit tax charge will be avoided.

The benefits of charitable giving

Giving to charity is not only good for the cause receiving your donations but is also beneficial to your annual tax bill. If you keep a record of your donations, you will be entitled to report these on your tax return.

The most common way to donate to a UK registered charity or community amateur sport clubs (CASCs) is through Gift Aid. Gift Aid can only be claimed by UK taxpayers and is effectively the repayment of basic rate tax on the donation. This is not repaid to the donor but is given to the charity as they can claim an additional 25p for every £1 they receive.

If you are a higher (40%) or additional rate (45%) taxpayer, you are able to claim the difference between your tax rate and the basic rate of tax (20%) on your total charitable donation. An example of this is shown below:

If you make a charitable gift of £100, the charity will be able to receive £25 from HMRC to reclaim the basic rate tax. As a higher/additional rate taxpayer, you can then claim a further £25 (higher) or £31.25 (additional) relief back via your self-assessment for the £125 (gross) contribution you originally made. To do this, you must register for gift aid with a ‘Gift Aid Declaration’, keep a record of your gifts and gift no more than four times your total income and capital gains tax payment for the tax year in question. More information can be found here.

And not forgetting, charitable giving is a great way to lower your loved one's inheritance tax bill.

Tax relief schemes and other allowances

An investment into a qualifying Venture Capital Trust (VCT), Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) attracts significant tax benefits. For an EIS or VCT, you can receive 30% income tax relief on the amount you invest, for SEIS this increases to 50% relief. This 30% or 50% is only achievable if you have paid sufficient tax for the year in question. For example, if you invested £200,000 into a VCT, you would receive £60,000 tax relief if you had an income tax bill of at least £60,000.
These investments were created by the government, as an initiative designed to help small and medium sized companies raise finance by offering tax benefits to investors. Given the type of companies they invest in, they are perceived to be high-risk investments.
They can be attractive to those who have maximised their other allowances for the tax year and are earning a significant salary which takes them into the higher and additional rate tax band.

But, as higher risk investments they are not suitable for all investors. There is a chance that all of your capital could be at risk and you should not invest into these types of plans without seeking expert advice from a reputable firm of independent advisers such as The Private Office.

How we can help

There are a number of actions that can be taken to reduce the amount of income tax you pay, which are especially beneficial if you fall into the higher or additional rate tax bands. These tax efficiencies are built into our financial plans, and we actively help clients maximise their allowances and income so they can achieve their goals throughout their lives. If you would like to find out more about how The Private Office can help you with personalised tax efficient financial plans, please enquire for a free initial consultation with one of our Independent Financial Advisers.

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The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

The content in this article is for information only and does not constitute individual financial advice.

A pension is a long term investment, the value of investments can fall as well as rise. You may not get back what you invest. 

Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation. 

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

VCTs are high risk investments and there may be no market for the shares should you wish to dispose of them. You may lose your capital.

As the landscape of pensions continues to evolve, understanding the nuances of regulatory changes is paramount for maximising tax efficiency and optimising your financial plans.

One recent development is the introduction of Transitional Tax-Free Amount Certificates, which offer a bespoke approach to deductions from the Lump Sum Allowance and Lump Sum and Death Benefit Allowance.

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But if this all sounds like jargon and hard to wrap your head around, lets us better explain as we delve into the intricacies of these certificates, examining eligibility criteria, potential benefits, and potential drawbacks. Our primary focus will be on illustrating how these certificates can potentially benefit Defined Benefit pension holders (also known as a final salary scheme, but also include public sector schemes for example, Career Average Revalued Earnings or CARE) through a detailed calculation demonstrating the potential impact on their tax-free cash entitlement at retirement.

What are Transitional Tax-Free Amount Certificates?

Transitional tax-free amount certificates serve as tools to accurately reflect tax-free lump sums received before April 6, 2024, within the new pension framework. They are issued by registered pension schemes, allowing members to increase the level of tax-free cash available to them.

The Lump Sum Allowance sets the tax-free lump sum a pension holder can withdraw from their pension pot during their lifetime. This is currently standardised at £268,275; however, this can vary depending on individual protections. Pension Protections were introduced to protect pension savings from previous reductions in the Standard Lifetime Allowance.

The lump sum and death benefit allowance governs the tax-free lump sum payments beneficiaries can take following the pension holders passing and is currently set at £1,073,100. However, this may be reduced by tax free lump sums already taken by the member.

For individuals who accessed their benefits post-April 5, 2024, a standard transitional calculation is used to ensure adjustments are made to the lump sum allowance and lump sum and death benefit allowance. In most cases this standard calculation effectively reflects past benefits utilised and aligns correctly with the new regulatory framework. However, in certain circumstances, some individuals may qualify for a higher allowance by applying for a transitional tax-free amount certificate.

For Defined Benefit Pension Scheme members, two such circumstances are as follows:

• Members of Defined Benefit Pension Scheme where they opted to take a full scheme pension and did not receive a tax-free lump sum. 
• Members of a Defined Benefit Pension Scheme who received a tax-free lump sum which was less than 25% of the pension’s value for lifetime allowance purposes (calculated as 20x the pension, plus any tax-free lump sum).

In these circumstances transitional tax-free amount certificates may offer a bespoke adjustment to the lump sum allowance and lump sum and death benefit allowance, ensuring a more accurate representation of the individuals tax-free lump sum entitlement. By accounting for actual lump sum benefits received, before the regulatory shift, transitional tax-free amount certificates provide a tailored approach that may prove advantageous for some pension holders.

Impact for Defined Benefit Pension Holders:

Here we will provide an example situation to further clarify how transitional tax-free amount certificates could provide a benefit to an individual who has taken tax-free cash under the 25% from their Defined Benefit Scheme.

Scenario: 

Tom decided to begin drawing income from his Defined Benefit Pension t in 2020/2021. He took pension income of £27,500 per annum and chose to take tax free cash of £50,000.

If we assume Tom has Fixed Protection 2012 (giving him a Lifetime Allowance of £1,800,000) taking these benefits used up 33.33% of his Lifetime Allowance (£27,500 x 20, plus £50,000 = £600,000 which is 33.33% of £1,800,000).

As this example explores, if you have not taken your full tax-free cash entitlement, you could be entitled to a larger lump sum allowance and lump sum and death benefit allowance by applying for a transitional tax-free amount certificate. This could allow you to take more tax-free cash from any other pension schemes you may hold and the implications of this could be significant. In this example, c. £100,000 of additional tax-free cash could be available to the individual, though please note this is still based on 25% of the value of any pension funds from which tax free cash has not yet been taken (for defined contribution pensions). Therefore a £400,000+ pension pot would be required to take full advantage of the additional tax free cash which is now available.

How to apply for transitional tax-free amount certificates:

Eligible individuals must submit a transitional tax-free amount certificates application to the pension scheme before taking any tax-free cash post-April 5, 2024. The success of a transitional tax-free amount certificates application hinges on the provision of complete and accurate evidence verifying the individual's entitlement to a reduced deduction from lump sum allowance and lump sum and death benefit allowance. Applicants must thoroughly compile documentation demonstrating their actual tax-free lump sum entitlements before April 6, 2024, ensuring compliance with regulatory requirements.

Potential pitfalls of applying for transitional tax-free amount certificates

While transitional tax-free amount certificates offer tailored adjustments to allowances, individuals must carefully evaluate the potential impacts on their pension benefits. Notably, calculations can vary significantly from individual to individual. For example, not everyone who took less than their 25% tax-free cash will benefit from applying for transitional tax-free amount certificates. In some cases, the issuance of a certificate may result in a reduction of allowances. If the outcome proves to be unfavourable creating less tax-free cash entitlement after applying for the certificate, this decision cannot be reversed.

How we can help

In this article we delved into the potential benefits offered to individuals with Defined Benefit pensions by the new Transitional Tax-Free Amount Certificates. If you believe this could be advantageous to you, it is important to seek financial advice before proceeding further. The possibility of this decision weakening your future pension position underlines the need for a comprehensive analysis of your previous benefits taken across your pension schemes.

At The Private Office we offer the guidance required to navigate these complex changes to pension legislation, ensuring that you are positioned optimally for your future and that you maximise the tax efficiency of the benefits you are entitled to. We can provide tailored financial advice to aid you in establishing the impact of transitional tax-free amount certificates on your specific situation, and we can assist you by preparing your application for potential submissions to your pension scheme providers, should these prove advantageous.

If you would like to schedule a call with one of our advisers, please get in touch. We can arrange an initial meeting at no cost and with no obligation, to further explore your own personal situation together.

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

The Financial Conduct Authority (FCA) does not regulate tax advice.

A pension is a long-term investment. The value of an investment and the income from it could go down as well as up.  The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

The information in this article is based on current laws and regulations which are subject to change as at future legislations.

In November 2022, the UK’s Chancellor of the Exchequer Jeremy Hunt announced plans to reduce the threshold above which people would start to pay additional rate tax of 45%. From the 6th of April 2023, more Britons were dragged into the additional rate tax bracket as the 45% income tax levy, which previously applied to any income over £150,000, increased to apply to all earnings over £125,140.

In addition to this, Jeremy Hunt also announced that the Government was extending the freeze on the personal allowance, along with income tax thresholds for basic and higher rate, for a further two years on what was previously announced. 

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To better explain, the freezing of the income tax thresholds, which was originally announced in 2021, was meant to remain in place from 2022 to 2026. However, this was extended a further two years to 2028. Coined a modern day ‘stealth tax’, these tax freezes and the additional rate threshold reduction have pulled more and more Britons into higher rate tax bands. However, the additional rate of tax at 45% is not the highest rate you could be paying, in fact many more are now being dragged into the 62% tax trap. Are you one of them? 

What is the 62% tax trap?

You may have been thinking that the highest rate of income tax payable was 45%, at which point the rate of National Insurance is 2%, giving an effective tax rate of 47%.

But did you know you could be subject to an effective combined rate of income tax and national insurance of 62% if you earn over £100,000?

The 62% tax trap refers to the income band falling between £100,000 and £125,140 on which the employed or self-employed will effectively experience an income tax rate of 60% alongside national insurance contributions of 2%.

This is because for every £2 you earn over £100,000 per annum, you lose £1 worth of your £12,570 tax-free personal allowance.

Your tax rate only reduces to the additional rate of 45% after the entirety of your personal allowance for that year has been eroded, i.e. on income above £125,140.

Let’s bring this to life with an example of how the 62% tax trap works...

If we assume an individual who has earnings of £100,000 for the year, and they receive a bonus of £20,000.

From this bonus, £8,000 is immediately lost to standard 40% higher rate tax.

The double jeopardy here is the reduction in the personal allowance, which is reduced from the full entitlement of £12,570 to £2,570. This reduction of £10,000 means there is an additional £10,000 of income that sits within the higher rate tax bracket and is subject to 40% income tax. This is equivalent to a further £4,000 of income tax payable.

And then finally, there is the national insurance contribution payable on the bonus, which is at 2% above the higher rate tax threshold of £50,270, equating to £400 in this example.

The result is an effective tax rate of 62% with the individual taking home £7,600 of their £20,000 bonus!

How can I mitigate the 62% tax trap?

Now you might be thinking, how can I avoid falling into the 62% tax trap? One of the main levers you can pull to help reduce your tax liability, and help you to avoid this trap, is increasing your pension contributions, as this reduces your ‘adjusted net income’.

Pension Contributions

By making pension contributions you can reduce your effective income and keep your ‘adjusted net income’ below £100,000, allowing you to preserve your personal allowance of £12,570. 

You may have the option to make additional pension contributions by opting for part / all of any salary and/or bonuses to be paid directly into your pension via salary sacrifice. By opting for this approach, you receive your tax relief 'straight away' as you, in practice, will reduce your taxable earnings before any tax is paid. Via this method, a national insurance reduction also applies, giving a potential tax relief rate of up to 62% on pension contributions.

Alternatively, you can increase your personal or employee contributions which are made from post-tax income, which effectively receive 60% tax relief (the national insurance ‘cost’ is already suffered and cannot be reclaimed). Any pension contributions you make will receive tax relief of 20% from HMRC, which is added to the pension plan to which the contribution is made. This means if you were earning £120,000 and made a personal contribution of £16,000, HMRC would top this up by £4,000 to provide basic rate tax relief, resulting in an overall contribution of £20,000. This reduces your earnings by £20,000 bringing ‘adjusted net income’ down to £100,000 and avoiding the ‘tax trap’ by regaining the £10,000 of lost personal allowance to give a full personal allowance of £12,570.

Furthermore, as a higher rate tax payer you can also reclaim a further 20% tax relief via completing a self-assessment tax return or contacting HMRC directly. This means a ‘gross’ contribution of £20,000 will effectively only ‘cost’ you £12,000, before we factor in the Personal Allowance reduction being reversed, which provides a further tax saving of £4,000. This gives a ‘cost’ of £8,000 for a personal contribution of £20,000 in total, a massive £12,000 tax saving. 

Depending on your income for the tax year and the level of any employer contributions being made, you may be able to pay up to £60,000 into your pension and still receive tax relief on your contributions. You can sometimes make additional contributions into your pension if you have unused annual allowance from previous tax years 

Charitable donations

There are other options to reduce your income to avoid falling into this tax trap. Charitable donations, similar to pension contributions, decrease your ‘adjusted net income’ and can allow you to reclaim some / all of your personal allowance.

Learn more about how you can avoid this trap

Controlling your income to reduce your tax bill can be complex and time-consuming, but by engaging the help of a financial adviser we can advise and assist you on the best approach to suit your own personal situation and circumstances.

Please do get in touch if you have any concerns that you might be affected by this tax trap, or if you had any queries on general pension and financial planning as a whole. We’re offering anyone with £100,000 or more in pensions, investments or savings a free cash flow review worth £500. 

In our recent webinar: How to escape the tax raid on your Wealth, experts Christie Tillett and David Gruenstein talked about smart tax planning and how it has become essential to retain as much of your wealth as possible. 
Watch it back here!

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

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

The Rest is Elections

The British electoral system does not lend itself to coalition governments. Ask anyone from the Liberal Democrats how they feel about the Conservative/Lib Dem coalition of 2010 and they probably won’t refer to it in glowing terms. Historically, this means that the UK is subject, every now and then, to a lurch from right to left, or vice versa. With this lurch we tend to see fairly fundamental changes in policy. At least, we used to.

I don’t think I am being controversial by suggesting there is a strong possibility that Kier Starmer will be the next Prime Minister at some point this year. The last time we had a change from Conservative to Labour was Tony Blair’s victory, 27 years ago, in 1997, with a majority of 179. According to a recent poll, Labour is heading for a majority of 298! We’ll see. But already, many of our clients are thinking about what a Labour Government will mean for them and what, if anything, should they be doing to protect their finances.

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For Financial Advisers, we are always in a difficult position when it comes to offering advice on an unknown. At the time of writing, the Labour manifesto has yet to be written and we are short of precise detail. Without a crystal ball it would be unwise for us, or any other adviser, to recommend a course of action based on speculation. 

To a certain extent, we experience the same thing every year with the budget. I have been advising clients for over 35 years and every year I hear the same fears. Are we going to see the end of tax-free cash in pensions? Will higher rate tax relief on contributions be removed? Will any changes be retrospective? They are, in essence, the same fears as those before an election.

Will Labour tax the rich and give to the poor? 

Labour, in blunt terms, has always been associated with taxing the rich and redistributing to the poor. The Labour administration of the 70s imposed an eye-watering top rate of income tax at 83% for those with incomes above £20,000 (£221,741 in today’s terms). With the investment income surcharge of 15% added, this resulted in the now famously high-water mark of 98%, the highest rate since the war.

I think it is worth pointing out that politics from the 70s was far more polarised than it is today.  Tony Benn was openly attempting to nationalise virtually every British industry in sight, and the unions were hell bent on removing anyone from government who was more right wing than Che Guevara. If you haven’t done so already, I thoroughly recommend listening to the excellent ‘The Rest is History’ podcast ‘Britain in 1974’. Apart from highlighting this polarity, it is also a stark reminder of just how bad things had become.

Since the 90s the major parties have become (in historical terms at least) more centrist, and both Labour and Conservatives exhibit the same general desires when it comes to taxation and government debt. The current tax take (under the Tories) is the highest it has been since the war. The highest rate of income tax now is 45%, higher than it was under Labour in 2010. Admittedly, both parties have, in recent years, examined their political extremities (Corbyn for Labour and the Reform breakaway for the Conservatives) but the truth seems to be that monetarism has won the day and the days of ultra-high taxation and reckless borrowing seem to be history. At least for now.

How can you protect yourself? 

So, returning to the steps our clients can take to protect their positions, in advance of the general election, I think it will probably focus on the peripheral subjects such as the Lifetime Allowance, or good savings fundamentals, which apply regardless of elections.

The Lifetime Allowance (LTA) has just been abolished, but as soon as its demise was announced, Labour publicly stated that they would reinstate it. But without knowing what shape this will take, it is impossible for us to advise. They could simply reinstate the previous level (£1,073,100). If this is the case, it may be in our clients’ interests to ‘crystallise’ their pensions above this figure beforehand. But what if they don’t? What if the LTA is increased to £1.8 million and tax-free cash is increased to 25% of this figure as a conciliatory gesture? In this case, you would be penalised by crystallising pensions now, up to this number. This is because there is now a new ‘Lump Sum Allowance’ (LSA) which is £268,275, and this represents the aggregate maximum amount of tax-free cash that can be taken from all schemes. There is also no guarantee that any change, whatever it might be, wouldn’t be retrospective.

So, what else might change? As I mentioned earlier, this is a question which also crops up every budget and the best protection anyone can take is probably to make the most of any tax breaks which are currently available. 

First on the list is pensions. Obtaining tax relief on contributions is, and always has been, an extremely tax efficient move, especially for higher rate and, particularly, additional rate taxpayers. Not only do you receive tax relief on contributions (subject to annual allowance limits) but all pension funds grow free of capital gains tax and personal income tax. The pension fund is also outside of the estate for inheritance tax purposes.

ISAs are probably the next port of call with individuals permitted to invest up to £20,000 each tax year (plus a forthcoming British ISA allowing a further £5,000 each tax year). ISA funds are also free from capital gains tax and income tax which makes them superb retirement planning vehicles.

If a new government chooses not to change them then, well, they were a good idea anyway, and if they do change them (for the worse) then you have maximised tax efficiency beforehand (subject to there being no retrospective changes).

I think one thing is fairly certain. The UK is not in fine financial health and handouts will not be the order of the day. But like him or loathe him, Kier Starmer is no Tony Benn and, to quote Benjamin the donkey in Animal Farm, I suspect things will continue much the same as they did before. That is to say, badly! 

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

The opinions shared in this article are solely those of the individual and they do not necessarily reflect those of The Private Office. 

Financial Conduct Authority does not regulate tax planning.

A pension is a long-term investment. The value of an investment and the income from it could go down as well as up.  The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

The information in this article is based on current laws and regulations which are subject to change as at future legislations.

2024 will see some huge changes to pensions, not least the much-publicised abolition of the Lifetime Allowance (LTA). So how do you prepare for a rapidly changing pension landscape? With a general election around the corner and the likelihood of a changing Government how can you plan for changes in legislation that could well be scrapped later down the line?

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Lifetime Allowance

Taxation on pension funds has been a hot topic since the 2023 Spring Budget when the Chancellor announced his intention to abolish the ‘Lifetime Allowance (LTA)’. The LTA is the total value that someone can accrue within a pension over their lifetime without incurring certain tax charges. Under LTA rules you could face a tax charge of up to 55% on pension savings above £1,073,100. So, for people with large pension pots, the prospect of abolishing this allowance was welcomed.

The announcement also signposted the introduction of two new allowances which will restrict the amount of tax free lump sums which could be paid under the new pension regime from 6 April 2024.

The new Lump Sum Allowance is the upper limit on the tax-free cash someone can take from their pensions during their lifetime and is capped at 25% of the previous LTA (£268,275). 

The second allowance, the Lump Sum and Death Benefit Allowance will restrict the tax free lump sum which can be paid from your pension funds to your beneficiaries if you die before your 75th birthday. The Lump Sum and Death Benefit Allowance is set at £1,073,100 and the new regulation does not have any provision for these to increase over time to keep pace with inflation. 
If you had previously registered for one of the many forms of protection against the Lifetime Allowance and have not broken the conditions for maintaining your protection you will benefit from a higher Lump Sum and Lump Sum and Death Benefit Allowance. 

To account for benefits taken between 6 April 2006 and 5 April 2024 a transitional calculation has been provided so that individuals can calculate their remaining available Lump Sum Allowance and Lump Sum and Death Benefit Allowance.
There is a secondary calculation which can be undertaken for individuals who did not receive the full tax free cash lump sum entitlement of 25% when pension benefits were taken previously which may enable them to receive an increased Lump Sum and Lump Sum and Death Benefit Allowance. It is advisable to take financial advice when undertaking these calculations as they can be complex.

As soon as the Chancellor announced the abolition of the LTA, Labour announced that they would reintroduce the LTA if they are elected following the impending General Election with the current Prime Minister, Rishi Sunak, suggesting this will happen in the second half of this year. 

The number of people paying tax for breaching the LTA has been increasing in recent years (See Figure 1) , and the reintroduction of the limit after a period of overcontributing will push this number even higher. If the LTA is reintroduced at its previous level, it is estimated that around 250,000 people will be over the limit. 

Figure 1: Tax Paid for breaching lifetime allowance, Source: HMRC, 2024

Many are concerned that bringing back the cap will push senior NHS doctors into an early retirement. One of the key motivations for scrapping the LTA initially was to deter NHS doctors from retiring early to avoid tax bills.

Could a Labour government reverse the rules?

In the run up to the election we could see a sudden flurry of savers rushing to draw down on their pensions before the potential reintroduction of an LTA. To prevent this, Labour may decide not to go ahead with the reversal. 

Now that the legislation has been passed and HMRC have almost completed the implementation of the changes, tax experts have said it will be more difficult for policymakers to reverse the rules. This uncertainty leaves savers in a tricky position, as they try to second-guess the next move by a government.

So, do you make the most of the current pension rules or stay cautious in case Labour reverses the changes? In the past when the LTA has been changed HMRC has introduced protections for those who breached the new lower limit. Therefore, if the cap is reintroduced savers who are over the limit might be able to protect their pot. It is hard to predict how a new government might behave but many are hopeful for some form of protection.

If you are thinking about crystalising your pension early to avoid issues with a Lifetime Allowance tax charge, given the complexity of the matter, you should first consult your financial adviser.

Annual Allowance

It is also worth noting that the pension annual allowance changed from £40,000 to £60,000 on the 6th April 2023. Although there is not a limit on the amount that can be saved into pensions each year, there is a limit on the amount that can benefit from tax relief. The ‘Annual Allowance’ is the limit that an individual can contribute to a pension personally in any given tax year, whilst benefiting from tax relief. 

For example, someone receiving a salary of £40,000, would only receive tax relief on personal contributions up to £40,000, but someone on a salary of £80,000, would only attract tax relief on contributions up to  £60,000. It is important to note that lower limits apply to high earners or individuals who have already accessed some of their pension funds flexibly.

State Pension

The state pension is due to receive an 8.5% rise this month, taking it from £10,600 to £11,502 a year. This is the second largest percentage rise in the last 30 years. It is worth remembering that this isn’t the case for everyone who is entitled to the state pension, and there is no guarantee that the next government will retain the current “triple-lock” status afforded to the State Pension. 

You can read more about specific pension details published in the Autumn Statement here. 

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

The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. 

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).

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Firstly, let's look at the taxes most commonly payable:

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.

If this or anything you see in this article is something you would rather discuss with an adviser, please get in touch with us. We’re offering anyone with £100,000 or more in pensions, savings or investment a free initial review worth £500.  

In our recent webinar: How to escape the tax raid on your Wealth, experts Christie Tillett and David Gruenstein talked about smart tax planning and how it has become essential to retain as much of your wealth as possible. 
Watch it back here!

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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).

The Chancellor, Jeremy Hunt, recently delivered his ‘Budget for Long-Term Growth on 7th March 2024, announcing the latest raft of tax changes to contend with, many of which will come into effect from 6th April 2024. This all follows huge pension change announcements last year and the continued effects of the stealth taxes hitting us all. Navigating all of these can be hard so here’s a look at some of the key changes that might affect you this coming new tax year.

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National Insurance Changes

The national insurance rate for employees had previously been cut from 12% to 10%, with this change coming into effect on 6th January 2024. This is being further reduced by 2% to 8% from 6th April 2024, with both cuts applying to earnings between £12,570 and £50,270 per tax year. 

The Treasury says the average worker on £35,400 per year will save more than £900 a year as a result of both of these cuts in January and April. This figure rises to over £1,500 for anyone who is employed and a higher rate taxpayer. 

For the self-employed, the Government will reduce the main rate of Class 4 national insurance contributions from 9% to 6% from April 2024. This is an increase on the 1% cut that was previously announced at the 2023 Autumn Statement from 9% to 8%. Class 4 national insurance contributions apply to earnings between £12,570 and £50,270 per tax year. This could result in a potential saving of over £1,100 if you are self-employed with earnings over £50,270 per tax year.

The Government is also scrapping Class 2 national insurance contributions for the self-employed. Prior to 6th April 2024, you pay Class 2 national insurance contributions at £3.45 a week (£179.40 per year) if your self-employed profits are £12,570 or more for a tax year.

Abolition of the Lifetime Allowance, what does this mean? 

The lifetime allowance, a limit on how much you can build up in pension benefits over your lifetime while still enjoying full tax benefits, is being scrapped from 6th April 2024. The lifetime allowance for the 2023/24 tax year is £1,073,100.
This removal of the lifetime allowance follows the removal of the lifetime allowance tax charge from 6th April 2023. Prior to 6th April 2023, any withdrawals above the lifetime allowance limit were subject to 55% if taken as a lump sum, or 25% plus your marginal rate of income tax if taken as income. From 6th April 2023 up to 5th April 2024, any excess over the lifetime allowance (whether taken as a lump sum or income) is subject to your marginal rate of income tax. 

From 6th April 2024, the tax-free lump sum which can be taken from a pension pot (after the age of 55) will remain at 25% of the current lifetime allowance, equivalent to £268,275. This tax-free lump sum limit will be known as the Lump Sum Allowance (LSA). Any withdrawals above your LSA will be subject to your marginal rate of income tax.

Transitional protections may continue to apply, so it is worth checking whether the changes to the lifetime allowance may impact your tax-free cash entitlement.

An additional complication is Labour have indicated that should they be elected in the next general election, they plan to reverse the removal of the lifetime allowance. As ever, it is critical to keep on top of current legislation.

Changes to Capital Gains Tax  

If you hold investments outside of tax-efficient wrappers such as ISAs and pensions, or are planning to sell a second property, you should be aware of the cut to the capital gains tax (CGT) annual exemption. 
Within the 2022/23 tax year, the annual CGT exemption below which you would pay any tax on capital gains was £12,300 per tax year. This was cut to £6,000 from 6th April 2023, and will be reduced further to £3,000 from 6th April 2024, less than a quarter of what the exemption was in the 2022/23 tax year.

Capital gains tax on second property sales

The higher rate of CGT on residential property sales (excluding your main residence which is not subject to CGT typically) for higher and additional rate taxpayers will be reduced from 28% to 24% from 6th April 2024. This is in a move to try and encourage property sales in order to generate further tax revenue despite the cut in the tax rate.

The rate of CGT on residential property sales for basic rate taxpayers will remain at 18%. 

The CGT rates for any other asset sales will remain at 10% for a basic rate taxpayer and 20% for higher and additional rate taxpayers.

What is happening to the dividend allowance? 

Whilst the tax rates on dividend income will remain unchanged in the new tax year, similar changes are being made to the dividend allowance (as per the CGT allowance) which is being halved. The dividend allowance (below which no tax is payable on dividends) stood at £2,000 per individual per tax year, was reduced to £1,000 from 6th April 2023 and will be halved once again to £500 from 6th April 2024.

These changes make it even more important to be making use of your annual tax-efficient allowances, to reduce any potential tax liability on capital gains and investment income.

One implication of these changes is more individuals will fall above these tax-free thresholds, resulting in the potential need to complete a self-assessment tax return if not doing so already. 

Please do get in touch if you are unsure whether you will be affected by the reduction in these allowances.

High Income Child Benefit Charge (HICBC)

In order to support working families, the threshold to start paying back Child Benefit will be increased from 6th April 2024 from £50,000 to £60,000 per tax year. This applies to the highest earning partner for a couple.

The rate at which the Child Benefit is taxed away completely is being made more favourable, with 1% of the benefit taxed away for every extra £200 you earn above the threshold (instead of 1% for every extra £100 above the threshold in the 2023/24 tax year).

This means that the upper income threshold, where the Child Benefit is effectively taxed in full, is rising from £60,000 to £80,000.

From April 2026 (subject to consultation), the Government is planning to move to a household income system for administering the tax charge, rather than on an individual basis, so single earner families are not disadvantaged.

Further investment in UK businesses?

A new “British ISA” was announced in the Spring Budget following widespread speculation. This will be a further £5,000 tax-free ISA allowance for investments into British companies, and will be in addition to the standard £20,000 ISA allowance which is remaining unchanged.

Further details to follow including when this will be available.

“Stealth Taxes” – what are they?

Although the freezing of some tax allowances not mentioned above may look like a ‘neutral’ move with limited impact on your situation going into the new tax year, it is important to be aware of “stealth taxes”. While income tax bands, which are frozen until 2028, will remain unchanged from 6th April 2024, if your wage is increasing year on year (for example to account for inflation), you will be subject to a greater tax liability. 

Similarly, the Savings Allowance for savings interest, as well as the Inheritance Tax threshold (Nil Rate Band), are remaining at the same levels going into the new tax year, pulling more and more people into paying these taxes.

These stealth taxes, if left unattended, will be a drag on your income and accumulated wealth. 

Do I need to take any action?

With widespread changes across the tax landscape, it is as important as ever to ensure you are making use of the key allowances applicable to your personal situation, and minimising the amount of tax you pay on your income and/or wealth. 

If you’d like to learn more about what the changes will mean to you in the new tax year, why not get in touch and book in a free initial consultation with one of our expert advisers.

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

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

The Spring Budget 2024 confirmed some rumours, such as the introduction of a British ISA, and at the same time, contained a few surprises too. 

The main points are summarised below along with a reminder of some of the other changes coming into effect in April 2024.

Some measures are potentially subject to change until enacted into legislation.

If you have any questions or would like to speak to one of our expert financial advisers about the changes announced, contact us to arrange a free initial consultation.

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Pensions

Abolition of Lifetime Allowance (LTA) from 6 April 2024

A further Pension Schemes Newsletter / Lifetime Allowance Guidance Newsletter is expected this week but no further detail was issued as part of the Budget itself. Further information will be issued once it’s available.

State pension

Triple lock means new state pension and basic state pension will increase by 8.5% in April 2024. Full new state pension figure will be £221.20 per week.

Investments

Individual Savings Accounts (ISA)

The annual subscription limits all remain at their current levels in 2024/25, i.e.

• £20,000 ISA
• £4,000 Lifetime ISA
• £9,000 Junior ISA (and Child Trust Fund)

A new British ISA is to be introduced from a date to be confirmed. This will give investors an additional £5,000 ISA allowance each tax year, so on top of the current £20,000. There is a consultation paper in place to obtain feedback from ISA managers, but the idea is for allowable investments to include UK equites and potentially UK corporate bonds, gilts, collectives. 

As previously announced at the Autumn Statement, the government is to make changes to ISAs to simplify the scheme and widen the scope of investments that can be included in ISAs. To simplify the scheme the government will:

• Allow multiple subscriptions in each year to ISAs of the same type, from 6 April 2024
• Remove the requirement to make a fresh ISA application where an existing ISA account has received no subscription in the previous tax year, from 6 April 2024
• Allow partial transfers of current year ISA subscriptions between providers, from 6 April 2024
• Harmonise the account opening age for any adult ISAs to 18, from 6 April 2024
• Digitise the ISA reporting system to enable the development of digital tools to support investors

Reserved Investor Fund

The Reserved Investor Fund is a new type of investment fund designed to complement and enhance the UK’s existing funds rule. This meets the industry demand for a UK-based unauthorised contractual scheme, with lower costs and more flexibility than the existing authorised contractual scheme. The introduction date is still to be confirmed. 

Taxation

Income tax

All income tax rates and bands remain at their current levels in 2024/25. See our latest tax tables 2024/25.  

National insurance (NI)

National Insurance is paid by people between age 16 and State Pension age who are either an employee earning more than £242 per week from one job or self-employed and making a profit of more than £12,570 a year.

Following on from the NI cuts made in the Autumn Statement when the 12% rate of employee NI reduced to 10% from January 2024, the government is cutting the main rate of employee NI by 2p from 10% to 8% from 6 April 2024.

They are also cutting a further 2p from the main rate of self-employed National Insurance on top of the 1p cut announced at Autumn Statement and the abolition of Class 2.

This means that from 6 April 2024 the main rate of Class 4 NICs for the self-employed will now be reduced from 9% to 6%.

Child Benefit charge

The adjusted net income threshold for the High Income Child Benefit Charge (HICBC) will increase from £50,000 to £60,000, from 6 April 2024.

For individuals with income above £80,000, the amount of the tax charge will equal the amount of the Child Benefit payment. For those with income between £60,000 and £80,000, the rate at which HICBC is charged is halved, and will equal one per cent for every £200 of income that exceeds £60,000.

New claims to Child Benefit are automatically backdated by three months, or to the child’s date of birth (whichever is later). For Child Benefit claims made after 6 April 2024, backdated payments will be treated for HICBC purposes as if the entitlement fell in the 2024/25 tax year if the backdating would otherwise create a HICBC liability in the 2023/24 tax year.

In his Budget speech, the Chancellor announced that the plan is to move assessment for the HICBC to a system based on household income from April 2026. This is to remove the current unfairness meaning that a couple who each have income below the threshold, so could in 2023/24 have £49,000 pa each (£98,000 pa in total), wouldn’t be subject to the HICBC whereas another household with one person with income of £51,000 for example would.

Dividend allowance

As we are already aware, the dividend allowance reduces from £1,000 to £500 on 6 April 2024. Dividend tax rates remain the same at 8.75% in basic rate band, 33.75% in higher rate band and 39.35% in additional rate band (and 39.35% for discretionary trusts).

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Capital gains tax (CGT)

Annual exemption reduces from £6,000 to £3,000 on 6 April 2024 (a maximum of £1,500 for discretionary/interest in possession trusts – shared between all settlor’s trusts subject to a minimum of £600 per trust).

CGT rates remain as they currently are apart from the higher CGT rate for residential property gains (the lower rate remains at 18%):

• 10% for any taxable gain that doesn’t fall above the basic rate band when added to income and 20% on any gain (or part of gain) that falls above the basic rate band when added to income
• For residential property gains these rates increase to 18% and 24% (formerly 28%) respectively
• Discretionary/interest in possession trustees and personal representatives pay at the higher rates (20%/24% (formerly 28%))

Simplifications for trusts and estates

From April 2024 trustees and personal representatives of estates will no longer have to report small amounts of income tax to HMRC and taxation of estate beneficiaries will be simplified, as shown below:

• Trusts and estates with income up to £500 will not pay tax on that income as it arises
• The £1,000 standard rate band (effectively basic rate band) for discretionary trusts will no longer apply
• Beneficiaries of UK estates will not pay tax on income distributed to them that is within the £500 limit for the personal representatives

Stamp duty land tax (SDLT)

SDLT Multiple Dwellings Relief is being abolished from 1 June 2024. This applies to purchasers of residential property in England and Northern Ireland who acquire more than one dwelling in a single transaction or linked transactions. 

Changes to the taxation of non-doms

The concept of domicile is outdated and incentivises individuals to keep income and gains offshore. The government is therefore modernising the tax system by ending the current rules for non-UK domiciled individuals, or non-doms, from April 2025. A new residence-based regime will take effect from April 2025.

From April 2025, new arrivals, who have a period of 10 years’ consecutive non-residence, will have full tax relief for a 4-year period of subsequent UK tax residence on foreign income and gains (FIG) arising during this 4-year period, during which time this money can be brought to the UK without an additional tax charge.

Existing tax residents, who have been tax resident for fewer than 4 tax years and are eligible for the scheme, will also benefit from the relief until the end of their 4th year of tax residence.

Liability to inheritance tax (IHT) also depends on domicile status and location of assets. Under the current regime, no inheritance tax is due on non-UK assets of non-doms until they have been UK resident for 15 out of the past 20 tax years. The government will consult on the best way to move IHT to a residence-based regime. To provide certainty to affected taxpayers, the treatment of non-UK assets settled into a trust by a non-UK domiciled settlor prior to April 2025 will not change, so these will not be within the scope of the UK IHT regime. Decisions have not yet been taken on the detailed operation of the new system, and the government intends to consult on this in due course.

Furnished holiday lets (FHL)

The FHL tax regime, which relates to short-term rental properties, is to be abolished from April 2025.

Currently, if an individual lets properties that qualify as FHLs:

• The profits count as earnings for pension purposes
• They can claim Capital Gains Tax reliefs for traders (Business Asset Rollover Relief, relief for gifts of business assets and relief for loans to traders)
• They’re entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures

Raising standards in the tax advice market

A consultation has been issued to discuss the government’s intention to raise standards in the tax advice market through a strengthened regulatory framework. It sets out three possible approaches to strengthening the framework: mandatory membership of a recognised professional body, joint HM Revenue and Customs (HMRC) – industry enforcement, and regulation by a separate statutory government body. The consultation also explores approaches to strengthen the controls on access to HMRC’s services for tax practitioners.

This has relevance to anyone who may receive or provide tax advice or offers services to third parties to assist compliance
with HMRC requirements. For example, accountants, tax advisers, legal professionals, payroll professionals, bookkeepers, insolvency practitioners, financial advisers, customs intermediaries, charities and other voluntary organisations that help people with their tax affairs, software providers, employment agencies, umbrella companies and other intermediaries who arrange for the provision of workers to those who pay for their services, people who engage workers off-payroll, promoters, enablers and facilitators of tax avoidance schemes, professional and regulatory bodies, and clients, or potential clients, of all those listed above.

The consultation runs until 29 May 2024. 

VAT

The VAT threshold is increasing from £85,000 to £90,000 from 1 April 2024, the first increase in seven years. See our tax tables 2024/25 for more details. See our tax tables 2024/25 for more details.

If you’d like to discuss any of the changes announced in the Budget or would simply like to explore ways that you can minimise the amount of tax you pay on your wealth, why not get in touch and speak to one of our expert team of advisers. We’re offering anyone with £100,000 in savings, investments or pensions a free financial review worth £500.

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

The Financial Conduct Authority (FCA) does not regulate tax advice.