Overview
For the 2024/25 tax year, Employee National Insurance contributions will see an additional 2% decrease, following a 2% cut in January. However, due to frozen tax thresholds, many individuals are being nudged into higher tax brackets, leading to increased tax liabilities.
Despite a somewhat improved economic forecast, it remains crucial to fully utilise all available allowances and exemptions.
It’s important to assess how recent adjustments in National Insurance, ISAs, or CGT may impact your finances.
Key changes
The tax-free personal allowance is unchanged at £12,570, meaning no income tax is due on earnings up to this amount. The basic income tax rate remains at 20%, with the threshold for entering the 40% higher-rate tax bracket set at £50,270. For incomes exceeding £125,140, the additional-rate tax of 45% still applies. These thresholds are set to remain constant until 2028.
Scottish taxpayers follow different income tax rates.
In a notable development, the Spring budget announced a further 2% reduction in the main Employee National Insurance contributions (NICs) rate, a change described as ‘permanent’ by Jeremy Hunt. As a result, most employed individuals will now contribute 8% of earnings between £12,570 and £50,270 (and 2% of earnings above £50,270) for Class 1 National Insurance, while self-employed individuals will make Class 4 contributions at a rate of 6%.
Class 2 NICs have been abolished.
In the 2024/25 tax year, the Personal Savings Allowance permits basic-rate taxpayers to earn up to £1,000 in interest on their savings without incurring tax. Higher-rate taxpayers have an allowance of £500, whereas additional-rate taxpayers receive no allowance.
However, there are notable adjustments to Dividend Tax. The dividend allowance has been halved to £500 for the 2024/25 tax year. This reduction is significant for individuals who own company shares or receive dividends from funds or investment trusts, as it likely impacts their tax liabilities.
Given the alterations to the Dividend Tax, it may be beneficial to explore alternative strategies, particularly focusing on the more favourable tax allowances for pensions.
From 6 April 2024, the Lifetime Allowance ceases to exist. The LTA previously set a cap on the total amount one could accumulate in their pension without incurring extra tax charges. There will no longer be a maximum limit on pension savings accumulation.
This is particularly positive news for those who are either saving for retirement or are in the process of drawing from their pension savings.
The annual allowance for pension contributions, which includes contributions from you, your employer, or any third party, as well as tax relief paid into the pension, remains at £60,000. This is the maximum amount that can be contributed in a tax year while still receiving full tax relief benefits. Additionally, tax relief on personal contributions is capped at either 100% of your earnings within the tax year, or £3,600 for individuals earning below this threshold. A higher earner’s annual allowance may however be tapered.
For individuals saving for retirement, this opens up a significant opportunity to increase annual contributions to their pension funds, benefiting from the substantial tax reliefs available for pensions. You could also consider carrying forward your unused annual allowances from previous tax years.
However, there is a notable caveat. The government has introduced a cap on the tax-free lump sum one can withdraw from their pension, of £268,275, or 25% of the total pension value, whichever is lower. This means the maximum amount that can be withdrawn tax-free is set at £268,275, with any further withdrawals subject to income tax at the individual’s marginal rate.
Given this limitation, it becomes increasingly crucial to maximise savings in tax-efficient vehicles like ISAs, alongside pension contributions, to ensure a robust financial foundation for retirement.
For the year 2024/25, your ISA (Individual Savings Account) allowance remains unchanged at £20,000, applicable to both Stocks & Shares ISAs and Cash ISAs. Individuals can now also contribute to several of the same type of ISA in a given year.
There’s also an exciting development on the horizon: the proposal of a new ISA variant, tentatively named the British or UK Stocks and Shares ISA. This proposal is under consultation until June 2024. The aim of this new ISA is to bolster investment in UK-based companies, offering an opportunity to invest an additional £5,000 annually in a tax-efficient manner, beyond the standard £20,000 ISA limit.
Despite the persistence of high interest rates, they are expected to continue trailing behind inflation for the majority of 2024. The Office for Budget Responsibility (OBR) forecasts that inflation will not retreat to 2% until the beginning of 2025. This inflationary trend diminishes the real value of savings held in Cash ISAs or traditional bank accounts, as their growth cannot keep pace with rising prices. In contrast, investing in Stocks and Shares ISAs has more potential to deliver superior long-term returns for your ISA contributions.
The annual contribution limit for Junior Individual Savings Accounts (JISAs) continues to be £9,000. Along with children’s pensions, Junior ISAs represent an excellent opportunity to provide your children or grandchildren with an early financial advantage. The funds in these accounts are inaccessible until the child reaches 18 years of age, allowing their savings ample time to potentially increase, particularly if you opt for a Junior Stocks and Shares ISA, which may offer higher growth opportunities over the long term.
St. James’s Place does not offer Cash ISAs.
Somewhat surprisingly, no changes have been made yet to Inheritance Tax, with the Nil-Rate Band for 2024/25 remaining at £325,000, frozen until 2028, and the Residence Nil-Rate Band fixed at £175,000.
Over the past two years, the allowance for CGT has been reduced from £12,300 to £6,000. Starting from April 2024, the CGT exemption threshold, which is the maximum profit you can realize without incurring tax, will further decrease to £3,000.
More positively, for those considering selling a second home or a buy-to-let property, the CGT rate on the sale of property assets not classified as your primary residence will see a reduction, from 28% to 24% for higher and additional rate taxpayers, in the 2024/25 tax year.
Still have questions?
The past year has presented challenges on various fronts, underscoring the importance of seeking financial advice to ensure your finances are well-prepared for the tax year. It’s an opportune moment to evaluate your family’s financial situation and objectives.
We encourage you to contact us, to ensure you are fully utilising all available allowances this year.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA or a deposit with a bank or building society.
Please note that Cash ISAs are not available through St. James’s Place and although anyone can contribute to an ISA for a child only the parent/legal guardian can open the ISA for them.
