A series of tax changes and freezing of allowances from April 2024 are likely to place further pressure on our finances, but there are steps you may be able to take to reduce the burden.
The rising cost of living is already making it difficult for many of us to make ends meet, with the price of food, energy and other essential costs soaring over the past couple of years. Although there was some good news for employees in the Autumn Statement and this year’s Spring Budget as the Chancellor announced National Insurance cuts, many people will still face tax hikes thanks to the ongoing freeze in tax thresholds. People may also be impacted by increases in Council Tax and a reduction in dividend and Capital Gains Tax (CGT) allowances, among other tax changes.
Here we take a look at some of the tax changes that have come into effect in the 2024/25 tax year – and what you might be able to do to minimise the impact of these on your finances.
1. Dividend allowance reduced
The tax-free dividend allowance fell from £2,000 to £1,000 in the 2023/24 tax year, and reduces again to £500 from April 2024. If you receive more than your tax-free allowance in dividends in the tax year outside an ISA, you’ll pay tax on this income. The current dividend tax rates are 8.75% for basic rate taxpayers, and 33.75% for higher rate taxpayers.
What can you do about it?
Any dividends you receive on investments held within an ISA are tax-free, so if possible, it’s worth making use of your stocks and shares ISA allowance.
The ISA allowance for the current 2024/25 tax year stands at £20,000, and you get a new allowance at the start of each new tax year from April 6. It’s a case of use it or lose it with your ISA allowance, as you cannot carry it over into the next tax year. Read more about ISAs in our article Everything you need to know about ISAs.
Dividends received within a pension are also free from tax, and any pension contributions benefit from tax relief at your marginal rate, too. However, pension withdrawals above the 25% tax-free cash lump sum are taxed as income.
This tax year you can pay up to £60,000 into your pension and benefit from tax relief. You are also able to carry forward unused annual allowances from up to three previous tax years, under carry forward rules. Find out how these rules work in our article Pension carry forward explained.
Depending on your personal situation and employment status, using the carry forward rule can be complicated and you may need the help of a tax and/or a professional financial advisor. If you want help from an accountant, you can find a qualified chartered accountant in your local area using the Institute of Chartered Accountants in England and Wales’ (ICAEW) directory of chartered accountants.
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
If you’re married or in a civil partnership, you may be able to reduce your dividend tax bill by investing as a couple. For example, if you are a higher rate taxpayer, it makes sense to hold income-producing investments in your partner’s name, if they are a basic rate taxpayer, to reduce your tax liability.
2. Frozen income tax thresholds
The Class 1 rate of National Insurance contributions for employees has fallen from 10% to 8% from the start of the new tax year, with the rates for the self-employed falling by another 2p to 6%. Someone on a typical £28,000 salary will see an extra £309 a year added to their pay-packets thanks to the 2p Class 1 NICs cut.
However, despite this reduction in National Insurance, most people will end up no better or only a little better off next year, due to the freezing of tax allowances and so-called ‘fiscal drag’. This is the process by which people end up paying more tax when tax rates and thresholds are frozen, as they earn more and their assets rise in value. The current tax thresholds are £12,570 (basic rate), £50,270 (higher rate), and £125,140 (additional rate), and will remain frozen until April 2028.
Toby Tallon, tax partner at professional services and wealth management group Evelyn Partners, said: “Taken together with the January cut from 12% to 10%, this move on NI amounts to a total tax cut – compared to the situation in 2023 – of an annual £618 for a median earner and £1,508 for higher earners, or £51.50 a month and £125.60 respectively.
“That would be a reasonably significant tax cut in isolation, but it is swimming against a rising tide of taxation due to frozen or falling allowances and thresholds, not just for income tax but also capital gains, dividend and inheritance taxes.”
What can you do about it?
If you’re looking to reduce the amount you pay in income tax, it’s worth checking you’re on the right tax code, as you can get a refund of income tax payments if you’ve paid too much. Sometimes new employees are put on emergency tax codes when they change jobs, meaning they’ll be charged at a higher rate. You can use the government’s online tool to work out how much income tax you should be paying. You may be due a refund, you can apply for this here.
If you’re married, you may be able to use the Marriage Allowance to reduce the overall amount of tax you pay, by transferring up to 10% of your personal allowance to your partner. The personal allowance is £12,570 in the 2024/25 tax year, which means you can transfer £1,257. This gives your partner an increased personal allowance, and reduces their tax bill. You can also backdate your claim to any tax year since April, 2017. Find out more about this allowance and whether you might be eligible in our article Marriage Allowance explained.
3. Higher council tax bills
Most councils have increased council tax bills by 5% this April, with some hiking costs by as much as 10%. This means that someone in England in Council Tax band D, for example, will see their council tax bills rise from an average of £2,065 a year to £2,171 this tax year.
Check how much your council tax is increasing by finding your local council, if you don’t already know what this is, using the gov.uk tool, and look at its website. Check your latest bill to find out which council tax band your home falls under – these range from A to H.
What can you do about it?
You’re sent a council tax bill every April which details how much you’ll pay, and usually payments are spread over a period of 10 months. However, you can choose to pay over 12 months to reduce your monthly payments.
You may be able to claim a reduction in your council tax bill ranging from 25% to 100% if you live alone, you’re claiming certain benefits, on a low income, or have caring responsibilities. You can find out more from your local authority and apply to them directly for a council tax reduction. See if you’re eligible and find out more about how to apply at Gov.uk.
Find out more about ways you might be able to reduce your council tax in our guide 6 ways you might be able to save money on your Council Tax.
4. Inheritance Tax threshold frozen
The current Inheritance Tax threshold, called the ‘nil-rate band’, remains frozen at £325,000 in the 2024/25 tax year. It has stood at this level since April 2009, and any assets over and above this amount are usually subject to tax at 40%. There’s also a main residence allowance. This allowance applies in addition to the existing nil rate band, but only where the person who has died is transferring a property that was once their home, to their direct descendants (i.e. children or grandchildren). The residence nil-rate band is currently £175,000, having increased to this limit in April 2020.
These thresholds will continue to be frozen at this level until at least 2028, seeing more people paying this tax on death, as property prices rise. Find out more in our guide Understanding Inheritance Tax.
What can you do about it?
You can take some simple steps to reduce the amount of Inheritance Tax you pay. For example, you can give away up to £3,000 each tax year without this money being subject to your estate for Inheritance Tax purposes. If you’re married or in a civil partnership, you can make as many gifts to your spouse or partner as you want during your lifetime, free from IHT. Read more in our articles Which gifts are exempt from Inheritance Tax.
Other ways you might be able to reduce your liability to Inheritance Tax include taking out a life insurance policy that’s written in trust. Read more in our article Six ways to reduce Inheritance Tax bills. Bear in mind, though, that some of these options may not be suitable for you, so you should seek professional financial advice if you’re looking for specific recommendations based on your personal circumstances. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guide How to find the right financial advisor for you.
5. Capital Gains Tax allowance halved
The annual exemption for capital gains more than halved to £6,000 from £12,300 at the start of the 2023/24 tax year on 6 April 2023, and has fallen again to £3,000 from April 2024. This is the amount you can make in profits before you pay tax on gains from selling an asset. Capital gains tax is charged at the rate of either 10% or 18% (the higher rate applies to residential property) for basic rate taxpayers. For higher or additional rate taxpayers, the rate is either 20% or 24% (for residential property – this has been reduced from 28%).
What can you do about it?
If you hold investments outside an ISA and are planning on selling them this year, you may want to first consider moving them into an ISA, via a process known as ‘Bed and ISA’.
A “Bed and ISA” is a service offered by some investment platforms that allows you to sell an investment or multiple investments that you already have in a regular trading account and then to buy them back within an investment ISA wrapper in one process. This way, you retain your investment but get the tax benefits of the ISA as well going forwards.
Sarah Coles, head of personal finance at Hargreaves Lansdown said: “The slashing of the Capital Gains Tax allowance to £3,000 means investors planning to realise gains early in the tax year risk busting their allowances. Switching into an ISA on day one gives you the freedom to sell what you want when it makes the most sense for your finances, without thinking about tax.”
Find out more in our guide What is a Bed and ISA?
How to reduce your outgoings
Rising taxes are just some of the ways your finances will be squeezed over the next financial year.
Inflation remains much higher than the government’s 2% target, placing our finances under huge strain as it means the cost of most of our everyday essentials continues to rise sharply. Many of us will be looking at how to save money to help make ends meet. You can find plenty of tips in our article How to save money – 21 money saving tips.
Energy prices are thankfully falling, however, with the energy price cap having dropped from £1,928 to £1,690 on 1 April. However, there may be ways you can further reduce your costs, or get help with your bills. Read more in our articles The energy bills crisis: What can you do about soaring costs? and Energy saving tips: how to reduce your bills and Are you eligible for help with heating costs?
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