Rates of Annual Taxes and How to Handle Them

The ice of the UK economy has broken: according to the Spring Budget 2024, the country is sticking with its economic plan. To celebrate this achievement and spur further economic growth, the government has been finally able to introduce tax cuts for workers. What exactly changes the 2024/25 tax year implies, and how to prepare for a new financial year effectively: we unpack in our article.

Why is it important to understand taxes?

Getting the hang of tax liabilities is one of the major contributors to managing your finances wisely. Since the rates and bands tend to change from year to year, it’s in taxpayers’ interest to refer to the most current tables when trying to understand their financial obligations. 

 From a London perspective, where people face numerous financial challenges on their way to a decent standard of life, understanding the intricacies of tax liabilities can become a game changer. On the other hand, in London, an important financial centre, there is always a demand for specialised expertise in finances. Those interested in joining the city’s dynamic financial ecosystem might find it beneficial to consider sponsorship audit jobs in London and explore opportunities in tax-related roles. In such a way, you can ensure the most informed financial decisions for yourself and your family.

Are there Personal Tax Allowances and Income Tax Reductions?

Basically, no. As we see in the tax rates chart, the personal allowance and the threshold for the other three tax bands remained the same. 

• Personal Allowance: a 0% tax on incomes up to £12,570.
• Basic Rate: a 20% tax on incomes between £12,571 and £50,270.
• Higher Rate: a 40% tax on incomes between £50,271 and £125,140.
• Additional Rate: a 45% tax on earnings over £125,140.

National Insurance contributions

Surprisingly, they have been cut again. Starting from April 6, 2024, National Insurance contributions for employees whose earnings vary between the primary threshold and the upper earnings limit stand at 8%, instead of 10% (according to the 2023 Autumn Statement that took effect in January 2024). For employees whose income exceeds the upper earning limit, the tax rate is 2%, as in the previous tax year.

Employers, however, have not been affected by this wind of tax change: the rate of NICs for them invariably stands at 13.8% on earnings above the secondary threshold and 0% on earnings below it.

Capital gain tax

Starting on April 6, 2024, the tax rate for higher and additional taxpayers on the profit from selling a residential property falls to 24%, instead of 28% in 2023/24. For gains within the basic rate band, the residential property CGT rate remains at 18%. 

For self-employed individuals

Entrepreneurs have two things to cheer about. The class 4 National Insurance rate (for profits between £12,570 and £50,270) has been further reduced from 9% to 6%. If you make £30,000 as self-employed, in the 2024/25 tax year, you will pay £1,800 instead of £2,700. Profits over £50,270 are to be taxed at the same rate of 2%. 

The class 2 NIC is no longer due, saving self-employed individuals £179,40 in the next tax year. Class 2 small profits threshold per year remains unchanged (£6,725). Entrepreneurs whose income exceeds this threshold are not obliged to make the class 2 NICs anymore, however, they will still save their eligibility for state benefits. For those whose earnings are below the threshold, there is an option to make contributions voluntarily (£3,45 per week) to secure eligibility for contributory state benefits.

Pension tax relief

The maximum amount of money one can contribute to their pension funds without losing eligibility for tax relief remains unchanged at £60,000. Everything that goes about it is charged according to existing tax rates on earnings.

There used to be a limit on the amount of money people could accumulate in their pension pots and still be eligible for tax relief, known as the Lifetime Allowance. In the Finance Act 2024, the lifetime allowance is fully eliminated starting from April 6, 2024.

Two new allowances went into effect on 6 April 2024 instead: the ‘lump sum allowance’ (LSA, £268,275) and the ‘lump sum and death benefit allowance’ (LSDBA, £1,073,100). The LSA caps the amount that can be taken tax-free in a lifetime, whereas the LSDBA caps the amount that can be taken tax-free in life and death combined. 

Marriage allowance

The set amount that married couples or civil partners can transfer to each other remains unchanged and stands at £1,260 for the 2024/25 tax year.

Married Couple’s Allowance relief for those born before 6 April 1935 is given at 10%, with the maximum amount being increased from £10,375 to £11,080, and the minimum – from £4,010 to £4,280.

Other allowances

Blind Person’s allowance has been increased from £2,870 to £3,070. Dividend allowance and Personal Savings allowance remained the same.

Tips on planning your finances for the 2024/25 tax year

• Turn to a financial advisor to get your head around tax-efficient planning. It includes opportunities to increase tax-efficient income while reducing tax liabilities.
• Consider making the most of tax-free investments such as Individual Savings Accounts (ISAs).
• Contributing to tax-advantaged retirement accounts will result in reducing current taxable income. 
• Utilise all available family tax allowances, including marriage allowance and children benefits.
• Take advantage of all additional tax reliefs for businesses. 
• Consider charitable contributions: they open doors to various tax reliefs.
   

Sources:

1. Direct taxes: rates and allowances for 2024/25
2. Annex A: rates and allowances