Tax Optimisation Archives - Page 2 of 3

Employee Share Options as an Employment Benefit

What you need to know

Overview:

Many high-earning professionals receive shares as part of their remuneration package, which can impact their tax situation. Understanding different Employee Share Options arrangements can help optimise tax efficiency.
Employee Share Options schemes vary and often have different tax implications. For instance, under the Enterprise Management Incentives (EMI) scheme—frequently used by start-ups—employees can benefit from Business Asset Disposal Relief on Capital Gains Tax upon selling their shares.
Seeking expert advice is crucial to maximise any available tax reliefs and make the most of your wealth.

In today’s business climate, companies are carefully structuring remuneration packages, with Employee Share Options schemes becoming a popular option to promote employee loyalty. Such schemes can motivate employees, especially those in senior roles like executives and directors, by giving them a personal stake in the company’s success.

Simon Martin, Chartered Financial Planner at Technical Connection (a company owned by St. James’s Place), notes that many high-net-worth clients’ remuneration packages include either direct shares or Employee Share Options, regardless of whether they work for private or public companies.

Different types of share schemes offer unique tax benefits, and the specific scheme available often depends on the company’s nature.

Explore your Employee Share Options benefits, with a no-obligation financial planning consultation.

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Common schemes

Enterprise Management Incentives (EMI)

Common among start-ups, the EMI scheme allows employees to purchase shares if they meet certain performance or tenure requirements. This scheme helps attract talent by providing the potential for investment returns in the future, even if the company can’t currently match larger firms on salary.

Technology companies frequently use EMI as it enables key employees to own shares and benefit from the company’s growth in a tax-efficient way. A company can grant up to £250,000 worth of share options over a three-year period.

With EMI, you might have the option to buy shares in the future at an agreed price, potentially much lower than their market value at purchase time. If shares were priced at £1 initially and are worth £10 when purchased, you could gain £9 per share.

If shares are bought at or above market value when the option was granted, no Income Tax or National Insurance is due. A discounted purchase will, however, incur Income Tax and National Insurance on the difference. When you sell, Capital Gains Tax (CGT) applies at a reduced rate of 10% (rather than the standard 20%) if the option has been held for at least two years.

Save As You Earn (SAYE)

SAYE is a popular UK share scheme available to all employees, not just higher-level staff.

With SAYE, you save between £5 and £500 monthly for three to five years, deducted from your gross salary. At the end of this period, you have the option to buy shares at a pre-set price, usually up to 20% below the market rate at the time.

If share prices drop, you can opt not to buy and withdraw your savings as cash, minimising risk. If you do buy the shares, they can be held or sold immediately for a profit. Income Tax and National Insurance do not apply, though CGT may be due unless shares are transferred to a pension or ISA within 90 days.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

Private Equity: Carried Interest Tax Treatment

Understanding the upcoming reforms to remuneration in private equity

The UK government has announced major reforms to the tax treatment of Carried Interest, set to take effect over the coming years. These changes will affect private equity executives, fund managers, and other stakeholders in the UK’s asset management sector.

This guide outlines the key elements of the reforms and how you can prepare.

The levels and bases of taxation can change at any time. The value of any tax relief depends on individual circumstances.

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Overview of proposed reforms

Increased tax rate
Starting from 6 April 2025, the Capital Gains Tax rate on Carried Interest will increase, from 18% for basic rate taxpayes, and 28% for higher/ additional rate taxpayers, to a single unified rate of 32%.

Further Reforms
The government intends to revise the taxation of Carried Interest, following an extended consultation period with industry stakeholders. This change aims to align tax treatment with the economic nature of carried interest, while simplifying the legislative framework.

Executives have the opportunity to provide input on these changes until 31 January 2025, either through written feedback or by requesting a meeting with HM Treasury.

Explore your options with an expert in financial planning for private equity executives.

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Key insights from industry feedback

HM Treasury’s Call for Evidence revealed a focus on maintaining the UK’s competitive position in asset management. Respondents to the Call for Evidence proposed several recommendations:

Minimum Co-Investment Requirements: A proposal to require fund managers to have a minimum investment in the funds they manage.
Long-Term Investment Incentives: Suggested adjustments to the Income Based Carried Interest (IBCI) rules to encourage long-term commitments.
Mandatory Holding Periods: Introducing a minimum holding period before carried interest payouts are permitted.
Simplified Taxation Structure: The adoption of a flat tax rate, rather than a blended rate that includes income and dividends.
Favourable Treatment for VC and Emerging Private Equity Funds: Adjustments to support venture capital and growth-stage businesses.

Respondents also highlighted concerns:

Employment Income Classification: Concerns about the complexities of treating all carried interest as employment income.
Individual Co-Investment Assessments: Avoiding requirements for co-investment at an individual level, which could create administrative burdens.
Transitional Considerations: Ensuring changes do not disrupt existing fund structures and are implemented with sufficient transitional provisions.

Government’s proposed framework for reform

The government intends to implement a new tax structure for carried interest within the Income Tax framework from April 2026, incorporating elements of the existing regime while introducing clearer, more stable guidelines.

Classification as Trading Profits: All carried interest will be treated as trading profits, subject to income tax and Class 4 NICs.
Effective Tax Rate of 34.08% for Additional Rate Taxpayers: For those in the highest income bracket, carried interest will be taxed at an effective rate of 34.08%.
Removal of Certain Exclusions: The current exclusion for employment-related securities from the IBCI rules will be eliminated.
IBCI Rule Enhancements: Specific amendments to the IBCI rules are planned, particularly to address the needs of private credit funds.

International and territorial considerations

For non-UK residents, the tax on carried interest will only apply to services performed in the UK, consistent with the existing Disguised Investment Management Fee (DIMF) rules and subject to double tax agreements.

Interaction with the new 4-Year Foreign Income and Gains (FIG) Regime

From April 2025, the new FIG regime will replace the remittance basis of taxation. Qualifying carried interest from non-UK services may be eligible for FIG relief, whereas non-qualifying interest under IBCI rules will largely remain unchanged.

Transitional provisions

The government does not currently plan to introduce transitional provisions, viewing the reforms as predictable under existing legislative guidelines. However, stakeholders are encouraged to submit any specific scenarios that may merit consideration before the final legislation is enacted.

Still have questions?

Private equity executives should assess their fund structures, co-investment strategies, and tax planning in light of these reforms. Participating in the consultation process may also help influence final policy details. Preparing for these changes now will help minimise potential impacts when the reforms take effect.

We encourage you to speak with an Apollo Private Wealth Adviser who is expert in financial planning for private equity professionals.

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.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

UK Resident Non-Domiciled Individuals: Helping you traverse reforms

Reforms to the Non-Dom regime from April 2025

This guide will outline the key changes and actions you can consider.

Explore your options, with a no-obligation financial planning consultation.

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Key planning actions

Inheritance Tax (IHT)

As of April 2025, Inheritance Tax (IHT) rules will undergo significant changes, affecting non-domiciled individuals who live in the UK. Here’s an overview to help you understand how the new rules may impact your estate and any trusts you have.

Current Rules vs. New Rules from April 2025

Current System

IHT liability is based on domicile status
Non-UK domiciled individuals only pay UK IHT on UK-based assets
Long-term UK residents (15 out of the last 20 years) are considered “deemed domiciled” and are subject to UK IHT on worldwide assets

Changes from April 2025

Domicile will no longer determine IHT. Instead, residency status will dictate IHT obligations.
Long-Term Residents (LTRs): Anyone who has been UK-resident for 10 of the last 20 years will be considered a “long-term resident” (LTR) and liable for IHT on worldwide assets, similar to UK domiciled individuals.

Key Points for Trusts and Excluded Property

Trusts Set Up by Non-Domiciles Before April 2025
Non-UK assets placed in trusts before April 2025 are considered “excluded property,” meaning they remain outside the UK IHT scope. However, this benefit might change if the trust creator becomes an LTR.
Trusts Set Up by LTRs Post-2025
If an LTR establishes a trust, the trust assets (even if held overseas) may fall under UK IHT rules. Trust assets may incur charges:
- At the trust’s tenth anniversary: If the settlor is an LTR, periodic charges may apply.
- Upon the settlor’s death: Assets in the trust could be taxed as part of the estate if the settlor is a potential beneficiary.
Shifting Residence Status
Assets may enter and leave the IHT net depending on whether the settlor remains an LTR. For example, if you retire abroad and lose LTR status, your trust assets may move outside the IHT net again, possibly triggering exit charges.
Exceptions
- Trusts set up by non-domiciles before April 2025 may retain “excluded property” status if the settlor passes away before April 2025.
- If the settlor was an LTR at death, the trust may still be subject to periodic charges.

Other IHT Considerations

Lifetime Transfers: Gifts or transfers of foreign assets made by a non-LTR are generally exempt from UK IHT. However, if the transferor later becomes an LTR, some assets may fall back within the scope.
Spouse Exemption: A non-domiciled spouse may choose to be treated as UK domiciled to benefit from an unrestricted spouse exemption. This election remains but with a longer exit period (10 years) post-2025.

Summary

The upcoming IHT changes aim to simplify rules but may complicate trust management for LTRs. Non-domiciled individuals should review estate plans and discuss any trusts with advisors to mitigate unexpected tax implications as their residence status shifts.

Still have questions?

Following the biggest set of tax increases in modern history, 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, and that you are adequately protected from risk, as far as possible, including any risk resulting from these changes.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

Adapting to the new Capital Gains Tax climate

Capital Gains Tax UK rates rise

The rates of Capital Gains Tax (CGT) have increased, with the changes coming into immediate effect as of the Autumn Statement on 30 October 2024.

This guide will outline the key changes and actions you can consider.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

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What’s changing?

Capital Gains Tax UK rates rise from 10% to 18% for lower rate taxpayers, and from 20% to 24% for higher and additional rate taxpayers.

The rates for residential property will remain at 18% and 24% respectively.

Previously, CGT was charged at a lower 10% rate and a higher 20% rate, so these changes will result in increased tax on disposals.

Each UK adult continues to benefit from an annual CGT allowance of £3,000.

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Key planning actions

Revisit any Carried Forward Losses

A capital loss must be claimed within four years of the end of the tax year in which the loss arose. If you have any previous losses you should ensure you notify HMRC within the stated timescale. Claiming these losses could potentially be used to offset capital gains in the current, higher-rate Capital Gains Tax (CGT) UK environment.

Utilise a spouse’s allowance

Each individual has an annual Capital Gains Tax (CGT) allowance of £3,000, so couples can reduce their tax liability by fully utilising both allowances. Transferring assets between spouses does not give rise to either a gain or a loss, enabling the recipient spouse to sell the asset and apply their own CGT allowance.

This strategy is also useful if one spouse is a lower rate tax payer than the other, so that gains are taxed at the lower rate. By splitting gains between spouses, you can double the tax-free amount available, making it a valuable strategy to consider before any planned disposal. This approach requires careful coordination and alignment with each spouse’s overall financial strategy and tax profile.

In-Specie Gifting

Philanthropic investors might consider asset-based (in-specie) gifting, as gains on assets gifted to charity are not subject to Capital Gains Tax (CGT).

International Bonds

International Bonds remain CGT- and Income Tax- exempt on internal bond assets, making them more attractive under the new rates. In addition, generally, individuals do not pay CGT when cashing in their international bond.

Deferral of Gains

Investors may consider deferring asset disposals, hoping for a future reduction in Capital Gains Tax (CGT) rates.

Collective Investment Vehicles

Unit Trusts and Open-Ended Investment Companies are not liable to Capital Gains Tax (CGT) within the fund. This means that individuals holding these investments have the ability to control if and when a personal CGT liability will arise by deciding when the holdings are disposed of – e.g. waiting until the following tax year to make effective use of that year’s CGT exemption (assuming there are no legislative changes which reduce or abolish the exemption).

However, they come with added costs and require alignment with investment goals. Some alternative investments, suitable only for sophisticated investors, also offer deferral opportunities through reinvesting gains.

Corporate Holding Structures

For those using Family Investment Companies or Personal Investment Companies, the marginal difference between Corporation Tax (up to 25%) and Capital Gains Tax (CGT) (up to 24%) has narrowed. Still, these structures remain useful for succession planning and efficient income growth.

Utilise Individual Savings Account (ISA) Allowances

Every UK adult benefits from a £20,000 a year Individual Savings Account (ISA) Allowance.

Children under 18 also have a £9,000 a year Junior ISA Allowance.

Consider transferring assets into ISAs, utilising your allowance as well as any allowances that your partner/ children may have.

Still have questions?

Following the biggest set of tax increases in modern history, it’s an opportune moment to evaluate your family’s financial situation and objectives.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

Autumn Statement Impact Assessment

The biggest set of tax increases in modern history.

On 30 October 2024, the UK’s first female chancellor made history with the biggest set of tax increases in living memory. Rachel Reeves’ Budget means that the tax burden in relation to GDP is now the highest on record, surpassing even post-war levels in 1948.¹

After months of speculation surrounding a proposed ‘tax on wealth’, Labour’s first budget in well over decade has brought about sweeping changes to the UK tax landscape.

Arguably the most significant impact will be felt by;

Income Taxpayers
Private Schoolparents
Employers and Business Owners
Private Equity Professionals
Capital Gains Taxpayers
Estates on which Inheritance Tax (IHT) is due (soon to include Pensions)
Non-Domiciled Individuals
Farmers
Purchasers of Additional Property

In the following sections, we outline the order of changes, now and in the coming few tax years.

1 Office for Budget Responsibility data from 1970 to 2024, estimates that the changes announced in 2024’s Autumn Statement will seize an additional £40bn in tax revenues, which is higher than any previous amount on record.

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Immediate consequences

Income Tax thresholds frozen

Although there were no changes to the headline Income Tax rates and thresholds, the thresholds remain frozen until April 2028. This stealth tax enables wage inflation to drag a higher proportion of UK taxpayers into paying increased amounts of income tax.

The OBR has forecast that 7.8 million UK taxpayers are likely to be dragged into higher tax bands during the freeze; 4.2 million will start paying Income Tax, with 3 million more pushed into paying the Higher Rate, and an extra 600,000 forced to pay the Additional Rate by 2027-28.

Employees generally pay Income Tax at 20% on income between the Personal Allowance Threshold and the Higher Rate Threshold; at 40% on income between the Higher Rate Threshold and the Additional Rate Threshold; and at 45% on income above the Additional Rate Threshold.

Employees continue to see their Personal Allowance tapered at a rate of £1 for every £2 of income between £100,000 and £125,140, resulting in an effective 60% rate of income tax on this portion of their income.

Employees generally pay National Insurance Contributions (NICs) at 8% on income between the Primary Threshold and Upper Earnings Limit, and at 2% on income above the Upper Earnings Limit.

Personal Allowance frozen at £12,570 per year
Higher Rate Threshold frozen at £50,270 per year
Additional Rate Threshold frozen at £125,140 per year
NIC Primary Threshold frozen at £242 per week
NIC Lower Earnings Limit frozen at £123 per week
NIC Upper Earnings Limit frozen at £967 per week
NIC Lower Profits Limit frozen at £12,570 per year
NIC Upper Profits Limit frozen at £50,270 per year

The last government introduced a plan to assess the threshold at which Child Benefit gets clawed back to be based on household income, rather than at the individual level. Labour are scrapping this plan.

Different rates and thresholds of Income Tax apply to Scottish residents.

Capital Gains Tax (CGT) rates increased

Effective immediately, from 30 October 2024, the rates of Capital Gains Tax (CGT) on shares and various other assets, are increased as follows;

CGT Lower Rate increases from 10% to 18% (a rise of almost double)
CGT Higher/Additional Rate increases from 20% to 24% (a rise of one fifth)

The CGT rates for residential property gains, which do not qualify for the private residence exemption, remain at 18% and 24% respectively.

A small, annual Capital Gains Tax (CGT) Allowance remains at £3,000.

Inheritance Tax (IHT) thresholds frozen

Despite the headline Inheritance Tax (IHT) rates and thresholds remaining unchanged, they have been frozen until 2030; an extension to the freeze of two further years. This stealth tax enables inflation to drag a higher proportion of Estates into paying IHT duties.

The majority of your assets will be subject to IHT if, when you die, the value of those assets exceeds the standard nil-rate band which currently stands at £325,000. If your spouse dies before you without fully using their nil-rate band, any unused percentage can be carried forward to use when you die, subject to a claim being made by your executors within two years of your death.

With the family home often making up a large percentage of an estate, the government has introduced an additional nil-rate band on top of the £325,000, known as the ‘residence nil-rate band’. The current residence nil-rate band is up to £175,000.

This means that if you give away a home that you have lived in as your main home to your children (including adopted, foster or stepchildren) or grandchildren, they won’t have to pay IHT on the first £500,000 (£325,000 nil rate band + £175,000 residence nil-rate band).

If you are a married couple or in a civil partnership then you can combine both your nil-rate bands, meaning that the first £1 million of your assets, including your property, are free from IHT.

Gifting allowances remain unchanged.

IHT Relief on AIM shares is reduced to 50%, giving an effective IHT rate of 20%.

Crucially, Pensions will be brought inside of Estates for IHT purposes from April 2027.

Meanwhile, Agricultural Property Relief and Business Property Relief will be reformed.

Finally, a person’s assets worldwide will be considered for IHT purposes in some circumstances, including for instance where they have lived in the UK for 10 of the last 20 years.

Private School Fees attract VAT at 20%

From January 2025, VAT will apply on Private School Fees at 20%. Schools will also be subject to business rates, where they had previously been exempt.

Many independent schools have already confirmed that they will pass some or all of the increased cost on to parents and fee payers.

While the cost of tuition fees can vary widely depending on the school and location, sending your child to a private school as a day pupil currently costs, on average, £23,925 per year, rising to £42,459 for pupils who board.² The application of VAT could bring the average day fee to £28,710, and the average boarding fee to £50,951, overnight.

2 ISC Census and Annual Report, January 2024

Stamp Duty Land Tax (SDLT) additional dwelling surcharge increased

Effective the day after the Autumn Statement, from 31 October 2024, the Stamp Duty Land Tax (SDLT) Higher Rate for Additional Dwellings is increased by two thirds, from 3% to 5%.

This Higher Rate is applicable when you buy a residential property (or a part of one) for £40,000 or more, if it will not be the only residential property worth £40,000 or more that you own (or part own) anywhere in the world.

You may have to pay the Higher Rate even if you intend to live in the property you’re buying, and regardless of whether or not you already own a residential property. This is because the rules do not apply only to you (the buyer), but also to anyone you’re married to or buying with.

Investors’ Relief lifetime limit reduced

Effective immediately, the lifetime limit for Investors’ Relief is reduced, from £10 million to £1 million.

This will apply to qualifying disposals made on or after 30 October 2024, as well as to certain disposals made before 30 October 2024.

Non-domiciled individuals

With immediate effect, tax benefits are reduced for non-domiciled individuals who move money into Offshore Trusts.

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Access recording

Further ramifications from April 2025

Employer National Insurance Contributions (NICs) increased

From April 2025, the rate of Employer National Insurance Contributions (NICs) will rise from 13.8% to 15%.

The threshold at which Employer NICs is due, will also be lowered, from £9,100 to £5,000 per year.

Together, these measures will result in additional costs to employers of at least £615 per year, per employee – and in many cases, significantly more.

Prior to the measures introduced in the Autumn Statement, earnings adjusted for inflation were due for a modest increase of 0.2pc in 2026 and 0.3pc in 2027. Now they are set to fall by -0.2 and -0.1pc respectively. The OBR has stated that it estimates approximately 76% of the additional Employer National Insurance cost will be passed on to employees.³

More than 700,000 UK workers ‘inside IR35’ will wear the whole uplift, owing both Employer and Employee NICs.

However, more than 865,000 small businesses will benefit from changes to the Employment Allowance, which increases from £5,000 to £10,500. Employment Allowance lets businesses, charities and sports clubs reduce their annual National Insurance (NI) liability, if their employers’ Class 1 NI liability fell below £100,000 in the previous tax year.

Furthermore, businesses can still offer salary sacrifice schemes to their employees, which may have the effect of reducing Employer NIC liabilities. And, as a business owner, you could utilise a Small Self-Administered (Pension) Scheme (SSAS) to build your own tax-efficient investment pot towards retirement.

3 Office for Budget Responsibility, October 2024

Business Rates Relief reduced

From April 2025, those qualifying for Business Rates Relief will see their discount fall, from 75% to 40%. It is estimated that this discount ‘replacement’ will see qualifying businesses’ rates bills rise by 140% as a result.

Business Asset Disposal Relief (BADR) increased

From April 2025, the rate of Business Asset Disposal Relief (BADR) increases from 10% to 14%.

It is due to increase again from April 2026, to 18%.

BADR is available on disposals of business assets. It had reduced the rate of Capital Gains Tax (CGT) on qualifying gains to 10%, but now the relief/reduction is less.

Capital Gains Tax (CGT) on Carried Interest increased

From April 2025, the rate of Capital Gains Tax (CGT) on Carried Interest will increase, from 18% for basic rate taxpayers and 28% for higher/additional rate taxpayers, into a single unified rate of 32%.

Further reforms to the way that Carried Interest is taxed, are mooted from April 2026.

Carried Interest (or ‘carry’ for short) is one of the main forms of compensation in the private equity industry, and continue to attract a lower rate of tax than traditional income.

Non-Domicile Tax Regime abolished

The Non-Domicile Tax Regime will be abolished from April 2025.

It is set to be replaced by a residence-based scheme, described during the Autumn Statement as “internationally competitive.” Tax relief will apply to Foreign Income and Gains (FIG), and a Temporary Repatriation Facility will be introduced.

State Pension increased

From April 2025, the State Pension will rise by 4.1%, meaning a gain of up to £470 per year for those in receipt of the Full New State Pension.

Future impact from April 2026

Inheritance Tax (IHT) relief on business and agricultural assets significantly reduced

From April 2026, a £1 million allowance will be introduced for Inheritance Tax (IHT) relief on business assets and agricultural assets.

A new effective 20% rate of IHT will apply on the value of relevant assets above £1 million.

Business Asset Disposal Relief increases further

From April 2026, once again the rate of Business Asset Disposal Relief is increased, from 14% to 18% (vs 10% currently).

Capital Gains Tax (CGT) on Carried Interest reformed

Whilst details are yet to be given, it is mooted that Capital Gains Tax (CGT) on Carried Interest will be reformed altogether from April 2026.

Air Passenger Duty (APD) increased

From April 2026, the Standard Rate of Air Passenger Duty (APD) will rise by 13% for long haul flights, reaching up to £253.

APD is chargeable per passenger, on flights departing the UK. The Standard Rate applies to most premium economy, business class and first class fares.

Meanwhile, the Higher Rate of APD, applicable to each passenger travelling by private jet, will increase by 50%, reaching up to £1,141. Generally used as capital assets by corporations, jets allow businesses to increase productivity, and this extortionate increase in APD may have the effect of harming growth, and ultimately tax receipts. It is estimated that 70% of private aviation passengers are “middle managers going about their working day,” according to Steve Varsano, who runs The Jet Business aircraft brokerage on Park Lane.

Eventual changes from April 2027

Inherited Pensions brought inside of Estate for Inheritance Tax (IHT) purposes

From April 2027, any inherited Pension will be considered as part of an Estate for Inheritance Tax (IHT) purposes, meaning that for the first time, IHT will be due at up to 40%, subject to existing IHT rates and allowances.

Agricultural and Business Property Reliefs reformed

From April 2027, Agricultural Property Relief, and Business Property Relief, are each set to be reformed, though little more has been announced.

Air Passenger Duty increases further

From April 2027, Air Passenger Duty (APD) will rise once again, according to forecast Retail Price Index (RPI) at that time.

The effect will be felt most severely by those travelling privately, and in premium economy, business class and first class.

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What remains largely unchanged for now?

Income Tax thresholds and rates

Employees continue to pay Income Tax at 20% on income between the Personal Allowance Threshold and the Higher Rate Threshold; at 40% on income between the Higher Rate Threshold and the Additional Rate Threshold; and at 45% on income above the Additional Rate Threshold.

Personal Allowance frozen at £12,570 per year
Higher Rate Threshold frozen at £50,270 per year
Additional Rate Threshold frozen at £125,140 per year

Different rates and thresholds of Income Tax apply to Scottish residents.

Income Tax Relief on Pension Contributions

Income Tax Relief continues to be made available on Pension Contributions made personally, up to 100% of earnings or £3,600, whichever is higher.

They are further limited by an Annual Allowance, usually £60,000 which includes not only personal contributions, but also employer contributions, and any tax relief received by the scheme. Exceeding the Annual Allowance may result in a tax charge.

Pension tax relief will be granted at one’s marginal rate of tax.

Employee National Insurance (NI) Contributions

Employees continue to pay National Insurance Contributions (NICs) at 8% on income between the Primary Threshold and Upper Earnings Limit, and at 2% on income above the Upper Earnings Limit.

NIC Primary Threshold frozen at £242 per week
NIC Lower Earnings Limit frozen at £123 per week
NIC Upper Earnings Limit frozen at £967 per week
NIC Lower Profits Limit frozen at £12,570 per year
NIC Upper Profits Limit frozen at £50,270 per year

Capital Gains Tax (CGT) rate on residential and buy-to-let property assets

The rate of Capital Gains Tax (CGT) chargeable on gains from residential and buy-to-let property assets remains unchanged, at 18% for basic rate taxpayers and 24% for higher/additional rate taxpayers.

Inheritance Tax (IHT) rates and allowances

The majority of your assets will be subject to IHT if, when you die, the value of those assets exceeds the standard nil-rate band which remains at £325,000. If your spouse dies before you without fully using their nil-rate band, any unused percentage can be carried forward to use when you die, subject to a claim being made by your executors within two years of your death.

If you are a married couple or in a civil partnership then you can combine both your nil-rate bands, meaning that the first £1 million of your assets, including your property, are free from IHT.

Gifting allowances also remain unchanged.

IHT Relief on AIM shares is reduced to 50%, giving an effective IHT rate of 20%.

Crucially, Pensions will be brought inside of Estates for IHT purposes from April 2027. Meanwhile, Agricultural Property Relief and Business Property Relief will be reformed.

In a further blow, the government will increase the interest rate HMRC can charge on unpaid tax, from 7.5% to 9%. Families have six months to pay inheritance tax after the death of a loved one before interest is added to the bill; but grants of probate currently take nine weeks on average to obtain, and in complex cases, the process can drag on for over a year.⁴

⁴ Probate Registry, October 2024

Stamp Duty Land Tax (SDLT) on primary residences

The current rates and thresholds for Stamp Duty Land Tax (SDLT) remain unchanged for the purchase of a primary residence.

From 31 March 2025, the temporary increase to thresholds will end, and SDLT will be due on primary residences from £125,000 (currently £250,000), with the nil-rate threshold for First Time Buyer’s Relief also due to fall, from £425,000 to £300,000.

Corporation Tax

The headline rate of Corporation Tax remains at 25%.

Current expensing reliefs are maintained.

Individual Savings Account (ISA) Allowances

Individual Savings Account (ISA) Allowances are now frozen until 2030; an extension of two years that will face significant fiscal drag as a result of inflation.

By the end of the decade, the annual deposit cap of £20,000 will have remained unchanged for a total of 13 years. The issue is exacerbated by the hike in Capital Gains Tax rates.

The total ISA Allowance remains at £20,000.

The total Junior ISA Allowance (for under 18s) remains at £9,000.

The Lifetime ISA Allowance (for saving towards a first home or retirement) remains at £4,000, with a 25% government bonus provided on contributions. The home value limit of £450,000 appears to be unchanged.

Pension Annual Allowance

The standard Pension Annual Allowance remains at £60,000, although it may be reduced to as low as £10,000 if one has flexibly accessed income via their pension, or if they have high earnings and are subject to the tapered annual allowance.

Pension Carry Forward

The ability to Carry Forward unused Pension Annual Allowances from the previous three tax years, remains.

This means a theoretical maximum contribution of £200,000 may be made in the current tax year, subject to relevant earnings. For now, this is expected to rise to £220,000 in the 2025/26 tax year, and to £240,000 in the 2026/27 tax year, based on historical Annual Allowances.

Personal Savings Allowance (PSA)

The Personal Savings Allowance (PSA) is the maximum amount of cash savings on which interest is not taxed, and remains unchanged as follows;

For Additional Rate Income Taxpayers, the PSA is zero
For Higher Rate Income Taxpayers, the PSA is £500
For Basic Rate Income Taxpayers, the PSA is £1,000

Capital Gains Tax (CGT) Allowances

Each UK adult continues to benefit from a Capital Gains Tax (CGT) Allowance of £3,000 per year.

Interspousal mechanisms remain.

Dividend Tax Rates and Allowances

Dividend Ordinary Rate remains at 8.75%
Dividend Upper Rate remains at 33.75%
Dividend Additional Rate remains at 39.35%

Each UK adult continues to benefit from a Dividend Tax Allowance of £500 per year.

Pension Access Allowances

Replacing the now abolished Lifetime Allowance (LTA) are;

Lump Sum Allowance (LSA) of 25% of the value of your pensions up to a maximum of £268,275
Lump Sum Death Benefit Allowance (LSDBA) of £1,073,100
Overseas Transfer Allowance (OTA) equivalent to the LSDBA

The Lump Sum Allowance (LSA) limits the tax-free lump sums you can take from pensions. Any amount you take over your allowance will be taxed at your marginal rate of income tax.

The Lump Sum and Death Benefit Allowance (LSDBA) limits the tax-free lump sums you can take from pensions, as well as tax-free lump sums that can be paid to beneficiaries after your death.

The Overseas Transfer Allowance (OTA) limits the amount you can transfer to a qualifying recognised overseas pension scheme (QROPS) without tax charges applying.

These allowances, first introduced in April 2024, remain unchanged, despite speculation that the LSA in particular might have been reduced to £100,000. If you recently made a request to draw a lump sum from your pension, as a result of this speculation, then you may wish to consider whether this decision is still in your best interests.

Still have questions?

Following the biggest set of tax increases in modern history, it’s an opportune moment to evaluate your family’s financial situation and objectives.

Embark on your financial journey.

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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.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

Legacy Planning Redefined: Navigating the new Inheritance Tax landscape for Pensions

Pensions set to be brought inside of Estates for Inheritance Tax (IHT) purposes from April 2027

One of the most surprising announcements in Labour’s first Budget, was the Chancellor’s decision to subject pensions to Inheritance Tax (IHT). This policy reverses George Osborne’s 2015 decision to exclude pension pots from an individual’s Estate for IHT purposes. Although this change won’t take effect until 2027, it has already faced criticism as a “cruel blow” for grieving families.

This guide will outline the key changes and actions you can consider.

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What’s changing?

Currently, private pensions are not counted as part of an Estate, and are free from Inheritance Tax. If you inherit a private pension from someone who died aged 75 or older, you’ll pay income tax on it; however, if they died younger than 75, it’s tax-free, unless taken as a lump sum after two years.

From April 2027, pensions will be counted as part of the Estate. This shift might deter individuals from saving into their pensions.

When Osborne initially allowed pensions to be passed on tax-free, it was part of broader reforms, including scrapping the 55% charge on certain inherited pensions. Along with Jeremy Hunt’s abolition of the pension Lifetime Allowance (LTA), pensions became an attractive legacy planning tool. Now, however, the Government says it is “removing the opportunity for individuals to use pensions as a vehicle for Inheritance Tax planning.”

The Government has opened a consultation on implementing this change, as experts warn of complex administration challenges.

Families may need to rethink their Estate planning under this new policy.

It’s worth noting that pensions left to a spouse or civil partner remain inheritance tax-free. The inheritance tax spousal exemption allows married couples and civil partners to transfer their estate to one another tax-free upon death. In contrast, benefits passed to an unmarried partner may be subject to inheritance tax. Surviving unmarried partners could face reduced income and, as a result, a lower standard of living in retirement.

Explore your options, with a no-obligation financial planning consultation.

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Double taxation

Families may now face an effective 67% rate of tax on inherited pension funds following the rule changes; with a ‘double hit’ from the combined effects of Inheritance Tax and Income Tax.

The removal of the Inheritance Tax exemption effectively imposes a double tax on death benefits that don’t qualify for an Income Tax exemption, particularly for those who pass away after age 75. When the entire pension fund is subject to 40% Inheritance Tax, and beneficiaries are then taxed at their marginal rate of Income Tax on the remaining amount, this can lead to a combined tax rate of up to 67% on the pension’s death benefits.

Even basic-rate taxpayers could face a 45% marginal rate of Income Tax, depending on how they choose to withdraw the funds. Beneficiaries may choose between receiving a lump sum or ongoing income, which affects their tax rate. For example, a lump sum might push them into a higher tax bracket. These changes could leave families with less than a third of the original pension pot.

Key planning actions

Drawing the tax-free Lump Sum Allowance

Despite pre-Budget speculation, the Lump Sum Allowance (LSA) remains consistent, at one quarter of the previous LTA, or £268,275.

Withdrawing the LSA and using it during one’s lifetime, to fund spending, or make gifts to family members, could offer an efficient way to reduce the value a pension subject to Inheritance Tax.

Usual gifting rules apply; for instance, surviving seven years from making the gift.

Gifting

One could gift part of their pension pot to avoid the added levy. Regular income gifts may also help you avoid the seven-year rule: for example, taking £50,000 from drawdown each year, but only spending £30,000, allows you to gift £10,000 annually to a child’s pension or a grandchild’s ISA if done regularly and without diminishing your lifestyle.

Relocating into tax wrappers

Some savers may choose to withdraw from their pensions and pay income tax, to reallocate the funds into tax-efficient vehicles like ISAs. The decision comes down to a trade-off: either keep funds in your pension, or withdraw and pay tax to invest them in a more tax-efficient structure. Obviously each person’s circumstances will differ.

Still have questions?

Following the biggest set of tax increases in modern history, it’s an opportune moment to evaluate your family’s financial situation and objectives.

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.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

Paying For Private School Fees: Start Planning Early And Optimise For Tax Efficiency

Introduction

More children than ever before are attending private schools for a higher quality education, smaller class sizes, more abundant resources, and specialised academic and vocational programmes. The number of pupils attending private school has steadily increased over the past decade, with a record 556,551 pupils now attending 1,411 Independent School Council (ISC) member schools across the UK, the highest level since records began in 1974.¹

However, giving your children the best possible education comes at a cost, and the expense was already a barrier for many families – before the application of VAT to school fees from January 2025.

While the cost of tuition fees can vary widely depending on the school and location, sending your child to a private school as a day pupil had cost, on average, £23,925 per year, rising to £42,459 for pupils who board.² However, fees at some private schools can be considerably higher. Unless your school has absorbed some of the increasing costs, the application of VAT at 20% brings the average day fee to £28,710, and the average boarding fee to £50,951.

1, 2 ISC Census and Annual Report, January 2024

At a glance

Parents could face around £460,000 in day pupil fees or £815,000 in boarding fees for each child.
ISAs and Investment Bonds can be used as tax wrappers to save towards school fees, potentially making tax-efficient or tax-deferred returns on your investment.
Unit Trusts and General Investment Accounts (GIAs) may also provide access to investing in various asset classes, with tax treatment dependent on individual circumstances.

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Average boarding school fees to hit £50,000 per year

Taking a tax-efficient approach to saving towards private school fees…

Let’s assume that school fees increase by 3.5% a year. This would be the lowest increase seen over the course of a 14-year education, particularly in comparison to an 8% uplift from 2023 to 2024. Based on the average costs, parents could face around £460,000 in day pupil fees or £815,000 in boarding fees for each child.

However, while these figures are considerable, the sooner you start saving towards your child’s school fees, the better.

By starting early, saving regularly, and investing, parents could build up a substantial sum over time to help cover the costs of private education.

Taking a tax-efficient approach to school fees can help make private education much more accessible.

Key tax-efficient solutions

Individual Savings Accounts (ISAs)

An ISA is a tax-efficient investment vehicle that enables parents to put aside a certain amount each year, without incurring any income or capital gains tax (CGT) on the interest or investment returns earned on the savings.

If both parents make monthly contributions that fully utilise their ISA allowance (£20,000 per person in the 2024/25 tax year) from the child’s birth, this could accumulate to a sum of £585,000 by the time the child is 11 years old, based on 5% net annual growth after fees, compounding monthly.* Withdrawals from an ISA are tax efficient, so parents can extract funds as needed to pay for school fees without incurring any capital gains or income tax liability, or invest in other options, such as stocks and shares.

*These figures are examples only and they are not guaranteed – they are not minimum or maximum amounts. What you get back depends on how your investment grows and the tax treatment of the investment.

The value of an ISA 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 you invested.

The favourable tax treatment of ISAs may be subject to changes in legislation in the future.

On- and Offshore Investment Bonds

An Investment Bond is a tax-efficient investment wrapper that allows parents to save and invest to pay for private school fees. An Investment Bond invests in a range of assets, such as stocks, shares, bonds, and funds. You can invest a lump sum or make regular contributions.

During the term of the investment, returns earned within the bond are not subject to income or capital gains tax (CGT), providing significant tax savings over the long term with the option to draw down up to 5% of your original investment per year on a tax-deferred basis. As the 5% allowance is cumulative, any unused allowance is carried forward for up to 20 years.**

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

**Please note that if the withdrawals taken exceed the growth of the bond, the capital will be eroded.

Unit Trusts and General Investment Accounts (GIAs)

Unit Trusts and General Investments Accounts (GIAs) pool capital from multiple investors into a single fund, which is then invested across various asset classes, such as stocks, bonds, and property. Investors benefit from an annual dividend allowance of £500 in the 2024/25 tax year, and an annual capital gains allowance of £3,000 in the 2024/25 tax year.

Howver, Unit Trusts and GIAs are subject to income tax on any dividends or interests earned, which can reduce the overall tax efficiency of the investment. The tax treatment of these investments can also vary depending on personal circumstances, such as income level and tax bracket.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

Gifting Allowance

Under current UK tax law, individuals can give up to £3,000 per year to another person using their annual gifting exemption, including a child or grandchild attending a private school. If you are married or in a civil partnership, you can combine this with your partner’s allowance, resulting in a total annual gifting exemption of up to £6,000 per year.

This offers a tax-efficient way to pay for private school fees. However, financial gifts above £3,000 can be subject to inheritance tax (IHT) if the donor dies within seven years of making the gift. The current nil-rate band for inheritance tax is £325,000 per person.

If a parent has adequate disposable income, this may be utlisied to pay for education costs (including private school fees) under ‘Dispositions for the maintenance of the transferor’s children’ rules.*** A disposition is not a transfer of value for IHT purposes if it is made by one party to a marriage or civil partnership and is both:

– in favour of a child of either party and
– for that child’s maintenance, education or training for a period not ending later than the year ending 5 April in which the child attains the age of 18, or
– after attaining 18, ceases to undergo full-time education

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

***Further criteria applies within the HMRC IHT Manual IHTM04175 which is subject to change.

Scholarships and Bursaries

Many private schools offer means-tested bursaries to help with the cost of tuition. A third of pupils in private education receive means-tested bursaries,³ which can cover up to 100% of fees.

Bursaries are awarded based on financial need, and can be a valuable way for families who may not otherwise be able to afford private school, to access high-quality education for their children. The amount of the bursary awarded is based on a means test, which considers a family’s income, assets, and other relevant factors.

Scholarships are typically awarded based on merit, such as academic or athletic achievement, musical talent, or artistic ability. Scholarships may not cover the full cost of tuition. The proportion of fees covered will depend on the school and the type of scholarship offered.

³ ISC School Fee Assistance, April 2023

Paying in advance

Paying private school fees in advance can be a way to save money on the overall cost of tuition. Many private schools offer discounts to parents who pay tuition fees in advance, with the size of the discount increasing with the size of the advance payment.

However, parents considering paying fees in advance should carefully weigh the potential gains against the risks associated with tying up a significant amount of capital in pre-payment.

Depending on the investment chosen, there may be potential for higher returns than the discount offered for advance payment, but there is also a risk of capital loss.

Navigating a myriad of options

Private school education can provide children with a vital head-start and opportunities that help them to achieve their goals. However, it’s undoubtedly an expensive commitment, and navigating the options for paying private school fees can be complex and daunting.

Many options are available, including tax-efficient investments, bursaries and scholarships, pre-payment of tuition fees, and a range of capital drawdown routes. It’s important to carefully consider your options and obtain expert advice when planning and funding private school fees.

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 you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time, and are generally dependent on individual circumstances.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

Lifetime Allowance Changes: Carry Forward Pension Allowance up to £220,000

Introduction

In spring 2023, the government took pension savers by surprise, by announcing Lifetime Allowance changes, including the removal of the Lifetime Allowance (LTA) Charge. In the 2023/24 tax year, the tax charge for exceeding the Lifetime Allowance threshold of £1,073,100 (or a higher threshold where LTA protection applies) was effectively removed, and the Lifetime Allowance itself was abolished from 6 April 2024.

The Lifetime Allowance changes are particularly welcome news for those whose pensions were already above the value of the LTA, and who were nearing a benefit crystallisation event – including turning 75 years old, drawing down funds, purchasing an annuity, or indeed upon their death.

Many who stopped making contributions to their pension, will now be considering restarting contributions, including Carry Forward Pension Allowance. If you’ve been a member of a qualifying pension scheme, but haven’t used your annual allowances for 2024/25 (£60,000), 2023/24 (£60,000) or 2022/23 (£40,000), then together with this year’s annual allowance of £60,000, you could kickstart your pension by carrying forward these allowances to make a one-off contribution of up to £220,000.

However, it is critical to remember that from the 2027/28 tax year, pensions will be considered part of one’s Estate for Inheritance Tax (IHT) purposes.

How the Lifetime Allowance changes impact retirement planning and saving

Removing the LTA is designed to keep people in work, and attract people back to the workforce

In the UK, employers are required to contribute to their employees’ pensions at a minimum rate of 3% of qualifying earnings, subject to that employee contributing at least 5% of their qualifying earnings. Over time, it’s a considerable benefit of being employed in the workforce. Previously, as workers’ pension savings had approached the LTA, they were becoming disincentivised to continue working. Now, employees may work longer, and those who had already retired may consider re-joining the workforce, which could lead to greater macroeconomic performance in the UK economy, and potentially lessen the burden on the state to subsidise people’s retirements.

It’s also designed to further incentivise savers, to maximise their pensions before turning to other investment vehicles

While it’s important to note that the Lifetime Allowance Charge might be reintroduced in the future, its removal coincided with the government raising the annual allowance from £40,000 to £60,000 (or 100% of your UK Relevant Earnings, whichever is lowest) with effect from the 2023/24 tax year. The purpose of the LTA had been to cap the tax privileges of pensions. Additional rate taxpayers qualify for income tax relief on pension contributions at up to 45%. If an additional rate taxpayer had opted to use their entire annual allowance at the previous level of £40,000, they would have attracted up to £18,000 in tax relief. With the increased annual allowance of £60,000, they could gain up to £27,000 in tax relief; an additional £9,000 a year. This may incentivise a greater amount of pension saving, subject to the limits on tax relief on pension contributions, before savers turn to other investment vehicles such as ISAs. One option is to Carry Forward Pension Allowance.

The tapered annual allowance may still punish ‘late savers’

Despite the removal of the LTA charge benefitting many savers, the complex tapered annual allowance (TAA) remains for those with threshold income in excess of £200,000 and adjusted income in excess of £260,000 who will see their annual allowance (the maximum they may save into their pension that tax year and still benefit from tax relief) taper down (to a minimum of £10,000) by £1, for every £2 their adjusted income exceeds £260,000.

It doesn’t leave out those who took out fixed lifetime allowance protection

In 2012, 2014 and 2016, some pension savers had the opportunity to take out fixed protection against the falling Lifetime Allowance. Each form of fixed protection allows the claimant to retain the level of Lifetime Allowance that was available immediately before the reduction (£1.8 million, £1.5 million and £1.25 million respectively). As a result, those claimants have not made pension contributions for several years in order to preserve their protection.

With these Lifetime Allowance changes, claimants are likely to want to restart pension contributions. This would previously have automatically resulted in the fixed protection being lost and would have resulted in their maximum tax-free cash dropping to the current level of £268,275.

However, HMRC has since confirmed that, as long as fixed protection had been registered before 15 March 2023, the protections cannot be lost. They can therefore restart their contributions without renouncing their bigger tax-free lump sums.

What next?

If over the last few years, you had elected to cease making pension contributions, as the value of your pension crept above £1 million; then the Lifetime Allowance changes may represent a unique and valuable opportunity to significantly boost your retirement savings.

Assuming, as a member of a qualifying pension scheme, you have not used any of your annual allowances from the tax years 2022/23, 2023/24, 2024/25, and the current tax year 2025/26, you could make contributions amounting to up to £220,000 before 6 April 2026 – provided you are not subject to tapering in any of those years. This is via Carry Forward Pension Allowance.

The net cost of each £1,000 contribution could be as little as £550.

That’s because you’ll receive automatic basic rate tax relief of 20%, and an additional rate taxpayer may claim a further 25% tax relief via their tax return.

And, because of the gradual loss of your personal allowance for income between £100,000 and £125,140 resulting in an effective 60% tax trap, you could gain even more if restoring your full personal allowance.

However, it is critical to remember that from the 2027/28 tax year, pensions will be considered part of one’s Estate for Inheritance Tax (IHT) purposes.

There are a number of factors that may cause different results in individual circumstances, which is why it’s important to seek professional advice from an expert adviser, to help you maximise the amount you can contribute to your pension and benefit from tax relief on 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.

The value of any tax relief is dependent on individual circumstances.

Any tax relief over the basic rate is claimed via your annual tax return.

SJP Approved xx/xx/xxxx

Should you require more information or have particular questions, we invite you to contact us at your convenience.

Avoiding The 60% Income Tax Trap

Introduction

It’s often thought that the highest UK tax rate is 45% – but that’s not the case.

If you earn more than £100,000 per year, you could be taxed at a rate of 60% on income between £100,000 and £125,140.

Here’s how it works

If you receive income of £100,000 or more, the rate of Income Tax you pay will be impacted by the gradual removal of the £12,570 Personal Allowance (the amount of income you can receive each year without paying Income Tax). The personal allowance is currently tapered away at a rate of £1 for every £2 of income above £100,000.

Once your income is over £125,140, you don’t benefit from any tax-free Personal Allowance whatsoever.

Here’s an example

Let’s say your salary has increased from £100,000 to £110,000. Here’s how the extra £10,000 would be taxed:

£4,000 – the standard 40% rate of Income Tax for a higher rate taxpayer
Plus £2,000 – the additional Income Tax as the personal allowance is reduced by £5,000

That’s a total Income Tax liability of £6,000 on your £10,000 pay rise – or 60%.

Considerations to mitigating this 60% effective tax rate

Make pension contributions

Contributing more to your pension before the end of the tax year is an efficient strategy to lower your taxable income and avoid exceeding the threshold. This approach offers dual benefits: it decreases your tax liability and enhances your retirement savings concurrently.

Consider this scenario: receiving a bonus or pay increase of £10,000 raises your taxable income to £110,000. By using this to make a £10,000 pension contribution you avoid falling into the 60% tax bracket and so both restore your personal allowance and obtain higher rate relief on the contribution.

It’s worth noting that there’s an annual limit on pension contributions that qualify for tax relief, which is typically the lower of £60,000 or your annual earnings. For higher earners, your pension annual allowance might be tapered down further.

Other forms of Salary Sacrifice

If your employer offers salary sacrifice, you can choose to give up some of your regular pay or bonus in return for a different benefit.

The choice of benefits varies between employers, but often includes:

Electric or plug-in hybrid vehicle leasing
Childcare vouchers
Cycle to work schemes
Insurance, including life, health and dental

Your salary is then reduced by the cost of any benefits you choose.

What next?

If you would like to discuss how we can help you mitigate Income Tax liabilities, reach out to one of our experts who can discuss with you your individual requirements.

The levels and bases of taxation, and reliefs from taxation, can change at any time, and are generally dependent on individual circumstances.

The basic rate of tax relief of 20% is automatically applied to pension contributions. You must complete a Self Assessment tax return to claim additional rates of tax relief.

SJP Approved xx/xx/xxxx

Should you require more information or have particular questions, we invite you to contact us at your convenience.

Buy-To-Let and Tax: Protecting You and Your Estate

Introduction

Over the course of the last few years, major changes to taxation reliefs and rates have taken place for UK landlords. Explore the latest implications below.

Or, click here to explore specialist lending options including buy-to-let mortgages, residential and commercial mortgages, and investment-backed lending.

Tax considerations for buy-to-let landlords

Stamp Duty Land Tax (SDLT)

Stamp Duty Land Tax (SDLT) is levied upon the acquisition of properties, including buy-to-let properties. The payable amount varies based on the consideration given in return for the property. This will usually be the same as the price paid.

In England, the current rates of SDLT for buy-to-let properties bought for £40,000 or more, applicable when the individual already owns at least one property, are as follows:

5% on the first £125,000

7% on the portion from £125,001 to £250,000

10% on the portion from £250,001 to £925,000

15% on the portion from £925,001 to £1.5 million

17% on the portion above £1.5 million.

This will encompass holiday lets, as well as purchasing a property for children if the parents leave their name on the title deeds or vice versa. SDLT must be settled within 14 days following the completion of the property purchase. However, the amount of SDLT paid is deductible from any capital gains realised when the property is sold or gifted.

Different rates (of Land and Buildings Transaction Tax and Land Transaction Tax respectively) apply in Scotland and Wales.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Capital Gains Tax (CGT)

The sale of property (other than your main residence) may result in a capital gain. Certain ‘allowable costs’ such as SDLT and estate agent/solicitor’s fees and money spent on renovation can be deducted from the gain. In addition, each individual owner has an annual allowance which can be offset against any gain if it has not been used elsewhere in the same tax year. This is known as the annual exempt amount and it amounts to £3,000 per individual in the 2025/26 tax year.

Capital Gains Tax (CGT) is now levied on gains made on disposal of most chargeable assets at the rates of 18% and 24% (for basic and higher rate taxpayers respectively), including property.

Reducing CGT liability

There are legitimate strategies to reduce or defer the amount of Capital Gains Tax (CGT) payable, including offsetting any loss made on the sale of a buy-to-let property in the same or a previous tax year against the gain.

As mentioned above, you may also be able to deduct allowable expenditure, such as solicitor’s fees, costs of advertising the property for sale, any Stamp Duty Land Tax (SDLT) payable, and expenditure incurred on property renovations to arrive at the taxable gain.

Furthermore, it might be possible to mitigate or defer CGT liability by reinvesting an amount equivalent to any gain made into a suitable tax-efficient investment vehicle.

Any tax owed on gains from UK residential properties must be reported and settled within 60 days of selling the property. These deadlines apply to individuals, trustees, and personal representatives of deceased individuals who dispose of residential property. They are responsible for self-assessing the calculation of the amount payable, considering their annual exemption and any losses.

The rate of CGT payable is determined after making a reasonable estimate of taxable income for the year.

For disposals by UK residents, the reporting and payment requirements do not apply if the gain on the disposal (or the total gain if more than one property is sold) is not subject to CGT. This may occur if the gain is covered by private residence relief, unused losses, or the annual exempt amount.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Income tax on BTL income

Income received from letting out a BTL property is subject to taxation and must be declared as part of your Self Assessment tax return. The tax on this income is determined based on the investor’s Income Tax banding, which is currently 20% for basic rate taxpayers, 40% for higher rate taxpayers, and 45% for additional rate taxpayers.

You can potentially reduce the tax payable by deducting certain ‘allowable expenses,’ which typically include: interest on buy-to-let mortgages and other finance charges (though only at the basic rate); council tax; insurance; ground rent; property repairs and maintenance; legal, management, and other professional fees, such as those for a letting agent; and other property expenses, including building insurance premiums.

However, substantial improvements like extensions are not deductible for Income Tax purposes. Instead, they can be deducted from any capital gain on sale of the property.

Historically, it was possible for buy-to-let landlords to claim a ‘wear and tear allowance’, which allowed them to deduct 10% of the net rent from the rental income subject to tax to represent the replacement of furnishings etc. and therefore reduce their Income Tax liability on an annual basis. From 2016/17 onwards, the ‘wear and tear allowance’ was scrapped and you can only deduct expenses genuinely incurred on the replacement of qualifying expenditure which is likely to increase the landlord’s tax liability each year.

Impact of tax changes introduced from 6 April 2017

As mentioned above, the Finance (No. 2) Act 2015 introduced provisions that altered the deductibility of interest when calculating profits from rental property. These changes have been in effect since 6 April 2017 and gradually transitioned allowable deductions for finance costs to zero, with full implementation taking place from the tax year 2020/21 onwards. As of 2020/21, all financing costs incurred are eligible for only a basic rate tax credit.

At first glance, it may seem that basic rate taxpayers won’t face any additional tax burden under these rule changes. However, this isn’t necessarily the case, as these rules have altered the way that taxable income is calculated. For instance, consider an individual with rental income of £45,000 and employment income of £27,000, with mortgage interest totalling £30,000. Under the previous rules, the taxpayer would be deemed to have net income of £42,000 making them a basic rate taxpayer. However, under the current rules, beginning in 2020, total income for tax purposes would be £72,000, which even after accounting for the personal allowance, would push the taxpayer into the higher rate tax bracket.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Owning properties in a Limited Company

When deciding whether it would be tax-advantageous to hold your properties within a limited company, various factors come into play, including the number of property holdings, rental income levels and the need for access to that income, leveraging on properties and the extent to which capital gains might need to be paid if a disposal of the properties was made.

Holding properties within a company structure may be tax-efficient where the portfolio is highly geared due to the fact that limited companies are unaffected by the mortgage interest relief restrictions discussed above. Instead, finance costs are considered a business expense and remain fully deductible against rental income before corporation tax. Rental profit accruing to a limited company (after deduction of finance costs and other allowable expenses) is subject to Corporation Tax, at a rate of 25% for profits exceeding £250,000. However, small companies with profits up to £50,000 are taxed at a rate of just 19%, while profits falling between these thresholds are subject to a tapered rate. This makes the tax rate considerably appealing compared to the rates of 40% and 45% for higher and additional rate taxpayers, respectively where rental income can be accumulated within the company or extracted tax-efficiently.

However, if the property investor is reliant on the property rental income, it’s essential to consider how it will be extracted from the company. If the profit needs to be extracted in the form of dividends, over and above the annual dividend allowance of £500, rates of 8.75%, 33.75%, and 39.35% for basic, higher, and additional rate taxpayers, respectively, will apply at shareholder level i.e. after Corporation Tax has been paid – giving rise to an element of double taxation If the property works in the business, taking money as a salary will avoid this issue (as salary is a deductible expense for Corporation Tax purposes) but paying salary entails operating PAYE and paying employers’ National Insurance contributions, which may result in higher overall costs.

Furthermore, transferring an existing buy-to-let property into a limited company can pose practical challenges, especially if there’s an existing mortgage. Many lenders ask for a personal guarantee for a mortgage – in which case, the shareholder(s) who give the guarantee will be personally liable for the debt, if the mortgage repayments are not maintained. Alternatively, the property may need to be remortgaged with the company taking a corporate mortgage. Transferring existing buy-to-let property to a company can also trigger Stamp Duty Land Tax and Capital Gains Tax charges at the time of transfer. While planning can mitigate such liabilities in certain circumstances, seeking professional advice before pursuing the limited company route is imperative to determine whether these mitigation opportunities will be viable in any specific case.

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