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Income Tax

Income Tax is the largest tax source for the Government raising around 28% of all taxes. It was introduced in 1798 to help pay for the Napoleonic Wars as a temporary measure, abolished shortly afterwards and reintroduced in 1838 and has been in force ever since.

Comply with the law

The penalties for non-compliance are now so great that filing accurate tax returns on a timely basis is essential.

Personal tax returns are due by 31 January if filed electronically.

Disposals of UK residential property by an individual or trust, at a taxable gain, or by a non-resident individual or trust irrespective of whether tax is due, require a return to be submitted, and any tax due is paid, within 60 days of completion.

Tax needs to be paid promptly or interest will accrue on overdue amounts, and possibly penalties depending on the delay.

Use your allowances

Each individual has one set of allowances and they should not, if possible, be wasted. These may be reduced and/or lost as income increases.

Personal Allowance: £12,570 (Income Tax)

Annual Exempt Amount: £3,000 for 2024/25 (Capital Gains Tax)

Savings: £1,000 if a basic rate taxpayer, £500 if a higher rate taxpayer and nil if an additional rate taxpayer. “Savings” income is typically interest.

Dividends: £500 (UK and foreign dividends)

Income from self-employment: £1,000

Rental Income: £1,000

Varying tax rates

It may be that in some years a taxpayer's marginal rate of income will be higher than others.

A taxpayer should consider shifting income from future tax years into this year where advantageous, or vice versa. This can be done in a number of ways.

For example,

  • Closing a bank account before 5 April 2025 to crystallise interest in the current tax year.
  • Declaring a dividend before or after 5 April 2025 depending on personal circumstances.
  • For unincorporated businesses, making bad debt provisions general rather than specific, or disclaiming capital allowances can shift reliefs between tax years.

Consider gifting assets to your spouse

The top Income Tax rate is for annual income over £125,140.

Personal income over £125,140 is taxed at 45%. This is the highest tax rate.

National Insurance contributions (NICs) are now applied to all earnings so that the top combined tax and NIC rate becomes 47%.

The personal allowance is reduced by £1 for every £2 of net income over £100,000, so income between £100,001 and £125,140 is effectively subject to a combined tax and NIC rate that can rise to 62%, considerably more than 47%.

Individuals with incomes above or near these thresholds can reduce their tax liabilities by reducing their taxable income below £100,000. This can be achieved by:

  • Changing income into non-taxable forms
  • Using ISA allowances every year
  • Giving income yielding assets to a spouse with lower income
  • Investing in tax-efficient assets such as EIS, SEIS or VCT investments
  • Making pension contributions
  • Making payments to charities.

Child benefits and childcare

The child benefit claw back is one of the highest marginal tax rates of any taxpayer.

Child benefit is clawed back where annual taxable income (or the taxable income of a partner) exceeds £60,000. The claw-back is at 1% of the benefit for every £200 of income over £60,000, so that when income reaches £80,000 the financial benefit of the claim is entirely lost. If both partners can keep their annual taxable income below £80,000 child benefit will not be clawed back.

Exchange salary for benefits

Take tax-free alternatives instead of a bonus or salary.

Employers can offer employees the opportunity to sacrifice a salary in exchange for shares and share options, tax efficient benefits in kind or pension contributions.

Employees who sacrifice income (for example, to take them below the £100,000 threshold) in return for a tax-free pension contribution made by their employer would save Income Tax and NIC as well as retaining their personal allowances. This should be discussed with your employer, if appropriate. National Insurance contributions (NICs) are now applied to all earnings so that the top combined tax and NIC rate becomes 47%.

Go for gains

If you have substantial investments, consider rearranging them so that they produce either a tax-free return or a capital gain taxed at only 24% rather than income taxable at a maximum of 45%, for example:

  • Use of ISA allowances – ISAs provide tax free income and capital gains
  • Use of tax efficient investments such as EIS, SEIS and VCTs which produce tax free income and capital gains
  • Invest in Reporting Funds as opposed to Offshore Funds
  • Invest in quoted shares that do not pay a dividend
  • Invest in tax free assets such as wasting assets.
  • Borrow to invest in rented land, although for an individual interest relief is restricted to the basic rate of 20% if the property is residential.

Rent a room in your main residence tax free

Rent of up to £7,500 is tax-free by letting a furnished room in your personal home.

Working from home

If your job requires you to work from home during the tax year you should make sure this allowance is claimed. Unlike 2021/22 working from home must be required by your employer and you need to be able to demonstrate that you cannot work elsewhere. If it is a choice made by the employee it cannot be claimed.

Give to charity

Payments to charities made through the Gift Aid system benefit the charity and the donor.

A 45% taxpayer who pays £80 to a charity will receive £25 tax relief and the charity will be able to reclaim £20.

Gift Aid donations made personally to charities in 2024/25 can be treated as made in 2023/24 to accelerate tax relief, at any time prior to the submission of the tax return.

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