Featherstone’s Full Tax Planning Guide (2024/2025)

Now that your self-assessment has (hopefully) been submitted for last tax year, here are some key tax planning considerations prior to the end of this tax year, on 5th April 2024.

As ever, do get in touch with the team if you would like to discuss more about your tax planning.

• The annual allowance is a limit on the total amount of tax-relievable pension contributions. Pension contributions made personally are limited each year by a maximum of £3,600 gross, or ‘earned income’ (which includes salary but excludes dividends), up to a maximum of £60,000 gross. The annual allowance was increased from £40,000 to £60,000 for the 2023–24 tax year.
• Pensions remain hugely tax-efficient. Personal pension contributions benefit from income tax relief and are made net of basic rate tax at 20%. Higher and additional rate taxpayers can claim further tax-relief of 20% and 25%, respectively, through self-assessment. A £40,000 gross pension contribution for an additional rate taxpayer would therefore cost just £22,000 after 45% tax-relief. Pension assets grow free from income and capital gains taxes, and 25% of the pension can be drawn tax-free in retirement.
• The annual allowance reduces by £1 for every £2 of income over £260,000. The lowest annual allowance is £10,000 for those with an income over £360,000. Higher earners may be paying more than their allowance through enrollment in their workplace pension scheme. Employers will often find a workaround for this but may need to be prompted…
• With no earnings, it is possible to pay up to £3,600 into a pension each tax year, benefiting from 20% tax-relief equal to £720 for a £3,600 contribution. This can also be arranged for children, which may be an attractive long-term planning consideration for parents and grandparents.
• The Money Purchase Annual Allowance (MPAA) applies to those who have drawn pension benefits under certain arrangements and is designed to prevent the recycling of tax relief. This will increase from £4,000 to £10,000 in April 2023.
• The lifetime allowance (LTA) is still set to be abolished on April 6. The maximum level of tax-free cash is still capped by the ceding LTA at £268,275, equal to 25% of £1,073,100. High-value pensions over the former LTA cap can now be crystallized without any LTA tax charge. However, it is important to discuss this with your advisor, as there may be inheritance tax implications to consider.
• Pensions remain inheritance tax-free. Pensions inherited on death before age 75 are accessible tax-free, but on death after 75, they are taxed at the beneficiary’s income tax rate when drawn. It is important to ensure that pension beneficiary nominations are up-to-date with your pension provider.

• The annual ISA allowance is £20,000 for adults and £9,000 for children under the age of 18. The allowance cannot be carried over into future tax years.
• Currently, it is possible for 16 and 17-year-olds to contribute to both adult ISAs (cash only) and junior ISAs, giving a total allowance of £29,000. We expect this loophole to be removed.
• There is no restriction on holding cash in investment ISAs, and attractive rates are available on deposit and through money market funds within investment ISAs. This can provide flexibility for switching between cash and investments, avoiding cumbersome ISA transfers.

• Capital Gains Tax (CGT) is payable when assets are sold at a capital gain. This applies to assets held outside of ISAs and pensions, including general investment accounts, directly held shares, and second properties. There is no CGT on the sale of a principal private residence/main property. Other exclusions include wasting assets—wine, cars, and bloodstock—and, perhaps more relevant, premium bonds and qualifying Enterprise Investment Scheme (EIS) companies.
• Individuals have a CGT allowance of £6,000 this year, which reduces to £3,000 on April 6, 2024. Capital gains over the allowance are taxed at 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers (the applicable rates on residential property are 18% and 28%). The reducing CGT allowance is significant as it has been hovering around the £12,000 mark for the last decade.
• Realised capital losses can be used effectively to offset capital gains realised elsewhere—in the same or future tax years—as a way to reduce applicable CGT. If losses are reported to HMRC (via self-assessment) within four years, they can be carried forward indefinitely and used at discretion.
• For those with available ISA allowances, there is an opportunity to transfer up to £20,000 into an ISA from a taxable account/asset to realise a capital gain or loss. The catchy term for this is “bed and ISA.”
• A sale or repurchase of shares gives the company the opportunity to realise a capital gain or loss. Importantly, if repurchasing the same asset, it is important to wait at least 30 days so that the disposal is not matched to the repurchase, thus cancelling out the disposal for CGT purposes. It is, of course, possible to switch investment funds, which avoids this trap.
• It can be useful to consider a transfer of assets between spouses to make effective use of both CGT allowances, and/or if one spouse pays tax at a lower rate. Assets transferred between spouses are completed on a no-loss, no-gain basis, so the gain or loss is carried over between spouses.

The individual dividend allowance is £1,000 this year, reducing to £500 on April 6, 2024. Dividends are taxed at lower rates than other income, so dividend-producing assets owned outside of tax-efficient accounts can be held by lower-rate taxpayers, which may reduce tax on dividends between spouses, for example.

With the return of higher (normal!) interest rates, cash savings are generating healthier levels of interest payments than they have done for about 15 years. Interest from normal savings accounts is taxable, and it is important to pay attention to individual allowances and tax bands to keep tax at a minimum.

• The Personal Savings Allowance is £1,000 for the basic rate and £500 for higher rate taxpayers. It is not available for additional rate taxpayers. Interest earned within the allowance is tax-free.
• Interest earned within the £12,570 personal allowance is tax-free.
• Individuals with a total income (excluding interest) of less than £17,570 may access the Starting Rate for Savings, giving an additional tax-free allowance of up to £5,000 for interest earned over £12,570 per annum. This band reduces by £1 for every £1 of income over £12,570 and is used up once income surpasses £17,570.
• Cash ISAs allow for tax-free interest and may benefit those holding onto cash who may not benefit from the above allowances.

With the Spring Budget on March 6, 2024 and a general election this year, changes to legislation are somewhat inevitable! We will be keeping a close eye on any developments.

Regulatory Information 

This communication does not constitute tax or financial advice. All information is accurate at the time of writing. The value of investments can go down as well as up. Capital is at risk. Featherstone is a trading name of Featherstone Partners Limited, Old Brewhouse, Yattendon, Berkshire, RG18 0UE, which is authorised and regulated by the Financial Conduct Authority (799741) and registered in England (Company Number 11039522). 

Our clients enjoy the qualities of a smaller, friendlier firm, while benefiting from our team’s experience working at firms such as Goldman Sachs, UBS, GAM, Ruffer and Close Brothers. Aligning our interests with those of our clients, we invest alongside them, and our founders, staff, families, and friends are among our largest (and smallest) investors.