Are you looking to put more hard-earned money back in your pocket? With a robust financial plan, taxpayers can mitigate needless taxes on their income and assets. This is especially important in 2024-25 when housing and other living costs continue to rise.
Below, our Burnley financial planners offer some ideas to maximise your tax plan in 2025. We hope these insights are helpful. Please contact us to discuss your financial goals and strategy via a free, no-obligation consultation.
Tax-efficient savings
Are you paying needless tax on your savings interest? If not, could that be possible soon (e.g. as you build up an emergency fund)?
With interest rates as high as 5%, it may only take around £20,000 in cash savings for a basic rate taxpayer to cross the tax-free Personal Savings Allowance (£1,000). For a higher rate taxpayer, their PSA is even lower at £500.
This tax regime can lead to taxpayers making innocent mistakes. For example, suppose you get a pay raise that takes your earnings into the higher rate threshold for the first time. Suddenly, your PSA would be halved – possibly without you realising it. If you have regular savings that have produced over £500 for the tax year, you could inadvertently find yourself with a tax bill.
To mitigate such risks, consider how you could restructure your assets. One idea might be to move certain regular savings into Premium Bonds (the prize draws do not count towards your PSA). Another option could be to use a Cash ISA to shield some of your money from tax.
Tax-efficient income
The basic rate of UK income tax is 20% in 2024-25 (£12,571 to £50,270). For income between £50,271 to £125,140, the higher rate stands at 40%. For everything above that, it is 45%.
Progress income taxes are important to support key public spending. However, many people are paying more than necessary. This issue could be lessened with some careful planning.
For instance, if you are a higher rate taxpayer, one idea could be to ask your employer to enter a salary sacrifice contribution arrangement for your pension.
Imagine your salary is £50,000 (i.e. you are a basic rate taxpayer), and your employer offers you a £5,000 pay rise. Whilst the gesture is appreciated, this would take your salary into the higher rate band. To avoid issues like the reduced PSA, you could ask your employer to put the £5,000 straight into your pension instead.
This can reduce the amount of your earnings exposed to the 40% higher rate. However, it can be quite a complicated arrangement. So, it could be worth seeking financial advice before suggesting the idea to your employer.
If you are a shareholder in a limited company (e.g. a business you own), another idea could be to explore your income-to-dividend ratio. Dividends are subject to lower rates than income tax, which can open up tax planning opportunities.
For instance, a basic rate taxpayer gets a tax-free Dividend Allowance of £500. After that, the basic rate is 8.75%, much lower than the 20% rate for income tax.
As such, a business owner could structure their finances to take, say, £50,000 per year as a salary. This keeps her within the 20% basic rate whilst enjoying the tax-free Personal Allowance on earnings up to £12,570. If she needs additional income to support her lifestyle, she might consider taking this as dividends from the company (assuming this makes business sense).
Tax-efficient investing
If you have made the noble choice to invest and build your financial freedom, you likely want to shield your returns as much as possible from needless taxes.
Here, capital gains tax (CGT) is in the spotlight. In 2024-25, each taxpayer gets a CGT-free annual exempt amount of £3,000. For instance, if you sell a buy to let property and make a £50,000 profit, then £47,000 could be subject to CGT.
There are ways to mitigate CGT. One idea is to use a stocks & shares ISA. An individual can commit up to £20,000 per year to their ISAs and make tax-free asset disposals. Maximising this allowance could result in a significant CGT-free ISA portfolio over time.
Another idea is to spread asset disposals across multiple tax years (if you can wait). For married couples and civil partners, you can give/transfer assets like shares to your spouse without CGT. They could then use their annual exempt amount to dispose of the assets at a profit. This could save on your household’s overall CGT liability.
Pensions can be especially powerful tools for tax-efficient investing over the long term. Not only do they provide a tax-free “wrapper” for investment growth, but they also offer tax relief on the member’s contributions up to their annual allowance (£60,000 is the maximum, assuming there is no “carry forward”).
Next steps
Tax planning could offer considerable savings depending on your financial goals and situation. For the best insight and information, consider speaking with an adviser to explore your options.
If you’d like to make sure you’re taking the right steps to safeguard your financial future, please get in touch.
