Year-end tax planning 2024/25

An Individual Savings Account (ISA) is a simple savings plan that offers tax-free income. There is one for nearly every saver, and today, the ISA is still regarded as one of the best places to store cash.

The investment limit for 2024/25 is £20,000 per adult individual, which can be split between a cash ISA and a stocks and shares ISA. The ISA allowance limit of £20,000 will remain the same for 2025/26.

If you haven’t used your maximum allowance yet make sure you top up before 5 April 2025 as your allowance doesn’t roll over to the next tax year. Tip: Everyone should have an ISA, even if it’s just a basic cash ISA to dip into when you need some cash. You should look around and compare cash ISA rates each year. If you wish to leave your money there for a few years, consider a stocks and shares ISA instead. When considering things from a family perspective, please also bear in mind that ISAs will be unique to the individual holding them.

Any UK resident aged 18 to 39 can open a Lifetime ISA (LISA) and you can continue to pay into it until age 50. Savers can contribute up to £4,000 per tax year and the Government will then add a 25% bonus at the end of each tax year in respect of the contributions paid, meaning you could earn an additional £1,000 of tax-free cash annually.

The maximum bonus that could be achieved if opened at age 18 and with maximum contributions could be as much as £33,000, (£32,000 if happen to be born on 6 April). If you withdraw your cash from the LISA before age 60, other than to buy a first home or in exceptional circumstances such as terminal illness, you will have to pay a 25% penalty that’s applied to the total amount.

Tip: You can split your £20,000 ISA allowance: £4,000 into the LISA and the remaining £16,000 into a cash or stocks and shares ISA.

Any ISA other than a Junior or a Lifetime ISA may allow you to withdraw and replace money from your ISA at any time. This isn’t a special kind of ISA but a facility that the ISA provider may provide.

If you have a Flexible ISA and have taken money out during the current tax year, you are also able to put that money back into your ISA, on top of your unused ISA allowance within the same tax year.

For example, you have an ISA worth £40,000 and have not paid into it this tax year and need to make a withdrawal of £10,000. Your ISA allowance to the end of the tax year is now your £20,000 usual allowance, plus the £10,000 withdrawal so you could make a £30,000 contribution to your ISA.

If you’ve saved £20,000 into an ISA, or expect to do so, you can make a temporary withdrawal of £5,000 and then replace it, topping up your ISA savings for the year back to the full £20,000. So, if you want or think you may need this flexibility, check with your ISA provider that your ISA is eligible.

An Innovative Finance ISA (IFISA) lets you save with peer-to-peer lenders or invest in companies through crowdfunding websites.

An IFISA works by lending your money to borrowers in return for a set amount of interest based on the length of time you are prepared to leave your money untouched.

You can only pay into one IFISA in each tax year, but you can also pay into a cash ISA and stocks and shares ISA as long as you do not exceed your total ISA allowance (currently £20,000).

Anyone whose spouse or civil partner has died while holding an ISA can make arrangements to take over those ISA savings without losing the tax benefits.

This is in addition to any other ISA savings they may make and is not subject to the £20,000 annual investment limit or any other form of cap.

The allowance must be used within three years of the date of death, or 180 days from the completion of the administration of the estate. If you have cash of your own, you don’t have to wait for probate.

This allowance is not that well known so do take advice if you think you are eligible.

The Junior ISA (JISA) can be opened by a parent or guardian for anyone under the age of 18 who lives in the UK. The annual limit is £9,000 in 2024/25, and this allowance remains frozen for 2024/25.

There are two types of JISA: a cash JISA, a savings account where there is no tax on the interest on the cash saved; and a stocks and shares JISA, where the cash is invested and there is no tax on any capital growth or dividends received.

Tip: At the time of writing some of the best cash JISAs pay a rate of 4.5% (January 2025) so it is worth encouraging grandparents and other family members to contribute to your child’s JISA. In doing so, the grandparent is moving money out of their estate for IHT purposes which could be exempt if certain conditions are met.

Many can earn interest on some savings without paying tax. The first £1,000 of interest earned on savings has been tax-free for basic rate taxpayers (£500 for higher rate taxpayers) since 6 April 2016.

Any interest you earn from bank accounts, savings accounts, credit union accounts, building societies, corporate bonds, government bonds and gilts is covered. This includes interest earned on other currencies held in UK-based savings accounts. This was previously very beneficial however with c. 4% now available in savings, it means that a basic rate taxpayer could have £025,000 of savings in an account paying 4% per annum and pay no tax at all on the interest received. On the same basis, a higher-rate taxpayer could have savings of £12,500 without incurring tax on the interest.

Note, additional rate (45%) taxpayers do not benefit from this tax-free allowance.

Tip: Earn interest in ISAs 

• Basic rate taxpayers over the PSA limit – For every £100 interest you earn in normal savings, you only get to keep £80, whereas in an ISA you will keep the full £100.
• Higher rate taxpayers over the PSA limit – For every £100 interest you earn in normal savings you only keep £60, whereas in an ISA you get to keep the full £100.
• Additional rate taxpayers – For every £100 interest you earn in normal savings you only keep £55, whereas in an ISA you keep the full £100.

Individuals have a Capital Gains Tax (CGT) free allowance of £3,000 in 2024/25. The allowance remains at £3,000 for 2025/26. 

Generally, the rate of CGT you must pay depends on your income tax bracket, the type of asset you sell and the date it was sold.  Rates for disposals of assets other than residential property after 30 October 2024 have been increased and are now the same as the rates applying to residential property.

The marginal rates of capital gains tax for the 2024/25 tax year are as follows:

 If you haven’t used your CGT allowance for 2024/25, are there any assets that could be sold before 6 April 2025? If you have used up your allowance, consider deferring selling assets until the next tax year.

If your spouse is a basic rate taxpayer, gains realised by them will only attract tax at the lower 18% CGT rate to the extent of the unused income tax basic rate band and they may also have unused CGT annual exemption.

Tip: If you have substantial investments, seek advice to understand if it is possible to restructure these so that they produce either a tax-free return or a return of capital taxed at a maximum of only 24% under CGT, rather than income tax at up to 45%.

Many will associate pensions with funding your later retirement and providing financial security however, they can also provide a very valuable short-term planning tool. Where your salary and/or bonus, alongside other taxable income pushes you into a higher tax band, making a pension contribution works in a similar way as a charitable donation, reducing your ‘adjusted net income’ and therefore your tax liability.

Over the recent years, this has become particularly important for families. Those in receipt of child benefits and with adjusted net income over £50,000 will incur the ‘high-income child benefit charge’. Similarly, where a parent's adjusted net income exceeds £100,000, even if just by £1, they will lose their entitlement to 15 hours of free childcare. In addition at this level of earnings, the personal allowance is withdrawn by £1 for every £2 of earnings above £100,000.

Where a parent, claiming child benefit earns £60,270, they would have £10,000 of income subject to 40% income tax and also be subject to the high-income child benefit tax charge. This therefore creates a valuable window of opportunity to make pension or charitable contributions to reduce the impact of withdrawal of other income tax reliefs.

For most, the annual pension allowance, the amount you can save in your pension tax-free every year, is £60,000. However, special ‘carry forward’ rules mean you may be able to contribute up to four times as much. ‘Carry forward’ rules allow you to utilise any unused annual allowance going back three years, including both personal and employer contributions.

To take advantage, you must have been a member of a pension scheme during the tax year from which you intend to bring forward the allowance. The annual allowance in 2023/24 was also £60,000 and in the previous two tax years it was £40,000.

On a practical level, you need to deduct from the maximum allowance, any contributions made in each tax year by you and/or your employer for members of a Defined Contribution pension scheme

Personal “tax-relievable” contributions are also limited to the greater of £3,600 gross per annum, or 100% of your relevant UK earnings, in the tax year that the contribution is paid. You therefore need to ensure you have the appropriate earnings to support the tax relief you are claiming on your contribution. Note that not all income is classed as relevant UK earnings for pension contribution calculations, as it does not include things like rental income.

Your pension annual allowance in 2024/25 is tapered if your adjusted income in the year exceeds £260,000. Tapering stops when the annual allowance reaches £10,000. The amount you can contribute is dependent on your personal circumstances and the rules are complex, so it’s important you take advice.

Where you are a member of a Defined Benefit pension scheme, the annual allowance calculations differ significantly as your allowance used ignores your actual contributions and instead calculates how much your pension has grown. This calculation is complex, and you should seek financial advice if you are looking to maximise your annual allowance as a member of a Defined Benefit pension scheme.

Tip: If you are a married couple and only one of you is working, don’t forget that everyone is entitled to tax relief on a £3,600 allowance. Even with no earnings, making a net contribution of £2,880 will qualify for 20% basic tax relief providing an additional £720 into their Pension.

Currently, pensions held within trust fall outside a deceased’s estate. This is now all changing and from 6 April 2027 any unused pension funds will become part of the estate for IHT purposes and be potentially liable to tax at 40% (paid from the pension fund) unless bequeathed to a spouse or civil partner. 

In addition, where the deceased dies aged 75 or over the individual inheriting, the pension fund will pay tax at their personal marginal rate on any money withdrawn from the pot.

Tip: You should check the beneficiaries of your Pensions and ensure these remain appropriate and in line with your wishes.

Up to 25% of a pension fund can normally be taken as tax-free cash, however, if you don’t need it upfront, you can often draw it in stages. This is known as ‘phasing’ to give more tax-free ‘income’ each year, blending it with taxable income to use allowances effectively.

Of course, it’s possible to just take tax-free cash to meet income needs in the early years, for example, paying off your mortgage when you retire. However, it’s important to consider not just what results in the least amount of tax today, but the impact on tax due in the future.

Take into consideration the following:

• ISAs give easy access to tax-free money whenever it’s needed - no strings attached.
• Collective investments don’t benefit from gross roll-ups like pensions or ISAs and gains are subject to CGT. However, they open up access to the annual CGT allowance and dividend allowance, which unlock more options to create tax-efficient ‘income’.
• Investment bonds allow 5% tax deferred withdrawals each year and offshore bond gains are taxed as savings income, unlocking access to the savings allowances.
• Your State Pension can be deferred, but it’s subject to income tax when taken. This might be the time to turn down drawdown income to make the best use of allowances.
• NS&I provide a lot of tax-free vehicles but the appeal of these has been somewhat diminished by the savings allowance now generally available.
• Property, including the family home, can offer diversification and another source of wealth to draw on but can be costly, when considering the maintenance, management costs, repairs and borrowing, particularly on a buy-to-let.

IHT Nil Rate Bands (NRB) of £325,000 and Residence Nil Rate Bands (RNRB) of £175,000 will remain frozen until 2030. Any assets that exceed these thresholds are then subject to a 40% tax charge.

Non-domiciled individuals

From 6 April 2025 individuals who have been resident in the UK for more than four years will pay UK tax on their worldwide income and gains. Those who have been resident in the UK for ten years will also become subject to UK IHT on their worldwide assets. The IHT proposals are, however, subject to further consultation.

The Chancellor’s recent comments during the World Economic Forum in Davos suggest we can expect some updates to the proposed non-domicile changes, perhaps in reaction to reports of an exodus of wealthy individuals from the UK.

As welcome as revisions might be for non-domiciled individuals, these new rules are due to take effect from April 2025 and any changes to the incoming regime at this stage will cause further uncertainty with little time for those affected to react. To be able to plan efficiently and effectively, stability is also needed.

Affected individuals should continue to review their tax affairs and consider how the change will affect them in the future.