The 2024 tax year brings significant changes to how taxes are calculated in the UK, and whether you’re an employee, business owner, or investor, these changes may affect your finances. Understanding the implications of these updates is essential to managing your money effectively and avoiding unexpected financial hits.
This blog post will explore the most important 2024 tax changes and how they may impact your finances, from income tax adjustments to capital gains tax (CGT) reforms. Let’s begin!
Key changes in the 2024 UK tax year
Let’s break down the most notable changes that are set to affect millions of UK taxpayers in the coming year:
1. Changes to income tax bands and personal allowance
One of the key changes for 2024 is the freeze on income tax bands and personal allowances. While the rates remain the same, inflationary increases in earnings could mean more people fall into higher tax brackets, even if their purchasing power hasn’t significantly changed. This phenomenon, known as “fiscal drag,” effectively increases the tax burden for many workers.
For the 2024/2025 tax year, the personal allowance—the amount you can earn before paying income tax—remains at £12,570. Meanwhile, the higher rate threshold stays at £50,270. This freeze is significant as inflation continues to rise, eroding the real value of these thresholds. If you receive a pay increase, you might find yourself paying a higher percentage of your income in tax.
Impact on your finances:
– Middle-income earners: If you earn around £50,000, you may see more of your salary taxed at a higher rate.
– Higher Earners: Individuals earning above £100,000 will continue to see their personal allowance taper off, resulting in a higher effective tax rate.
2. Reduction in the Capital Gains Tax (CGT) allowance
Capital Gains Tax (CGT) is the tax paid on the profit made when selling an asset like shares, property, or other valuable investments. For the 2024/25 tax year, the CGT allowance has been cut significantly, from £12,300 in 2022/23 to just £3,000. This means that profits above this threshold will be taxed at the applicable rates.
The new CGT rates remain at:
– 10% for basic rate taxpayers.
– 20% for higher and additional rate taxpayers.
– 18% and 28% on property gains.
Impact on your finances:
Those holding assets such as shares or second properties will be particularly affected by this reduced allowance. It’s important to consider strategies to minimise your CGT liability, such as using an ISA to shield investment gains from tax.
3. Corporation tax increase
In 2024, the main rate of corporation tax increased from 19% to 25%. This change impacts businesses with profits over £250,000. However, small businesses with profits under £50,000 will continue to pay 19%. Businesses with profits between £50,000 and £250,000 will be taxed on a sliding scale between 19% and 25%.
Impact on your finances:
If you run a business with profits exceeding £50,000, your tax bill may increase. To mitigate this, you could explore options like making capital investments or adjusting your salary/dividend strategy.
4. National Insurance Contribution (NIC) changes
The freeze on NIC thresholds remains in place for the 2024/25 tax year, which means that as wages rise, more people will pay higher NICs. The employee NIC rate remains at 12% on earnings between £12,570 and £50,270 and 2% on earnings above this.
Impact on your finances:
If your salary increases, a higher portion of your income could be subject to NICs, increasing your overall tax burden.
5. Dividend allowance cut
The tax-free dividend allowance for individuals has been further reduced. In the 2024/25 tax year, this allowance will drop from £2,000 (In 2022/23) to £500.
Above this, dividends will be taxed at the following rates:
– 8.75% for basic rate taxpayers.
– 33.75% for higher rate taxpayers.
– 39.35% for additional rate taxpayers.
Impact on your finances:
Shareholders and Small Business Owners: If you rely on dividend payments as part of your income, this reduction will likely increase your tax liability. You may want to revisit your income strategy to minimise the impact.
6. Inheritance Tax (IHT) threshold freeze
Inheritance tax is charged on estates over a certain threshold, and for 2024/25, this threshold remains at £325,000, with an additional £175,000 for the main residence allowance. However, because property prices continue to rise, more estates could become liable for IHT due to this frozen threshold.
Impact on your finances:
If your property has increased in value, your estate may face a larger IHT bill when passed to beneficiaries. Estate planning, such as gifting assets or setting up trusts, could be essential to reducing this liability.
7. Pension lifetime allowance abolishment
In a significant move, the government has abolished the pension lifetime allowance in 2024. Previously, individuals were subject to additional tax charges if their pension savings exceeded a set limit (£1,073,100). Now, there is no limit on the amount you can save into your pension without facing extra tax charges.
Impact on your finances:
High earners and pension savers: This is a major win for those aiming to save large sums into their pensions without being penalised. It may encourage more people to contribute towards their retirement, especially those nearing the previous limit.
Practical steps to minimise the impact of the 2024 tax changes|
These tax changes will affect different people in various ways, depending on their income, assets, and investments. To stay on top of your finances and minimise your tax liability, consider these practical steps:
- Use tax-efficient investment vehicles: Make the most of ISAs (Individual Savings Accounts), which allow you to save or invest money tax-free. The annual ISA allowance remains at £20,000. By placing your savings or investments in an ISA, you can protect your money from income tax and CGT.
- Maximise pension contributions: Given the abolition of the pension lifetime allowance, now is an ideal time to maximise your pension contributions. Not only do pensions provide tax relief, but they also grow tax-free. Higher earners can benefit from tax savings by contributing more to their pension pots.
- Revisit your income strategy: For business owners and shareholders, the reduction in the dividend allowance means you may need to reconsider how you draw income. It may be worth reviewing whether taking a salary or dividends is the most tax-efficient approach for you.
- Plan for capital gains: If you are sitting on assets with unrealised gains, such as stocks or property, consider when you plan to sell them. If you are near the CGT allowance threshold, you may want to spread out your disposals over multiple tax years to take advantage of the annual exemptions.
- Consider estate planning: With the inheritance tax thresholds frozen, it’s crucial to plan your estate carefully. Gifting assets during your lifetime, setting up a trust, or making use of reliefs, such as the residence nil-rate band, could help reduce the amount of tax your beneficiaries will need to pay.
- Seek professional advice: Finally, given the complexity of tax planning, it’s worth seeking the help of a financial adviser or tax professional. They can help you navigate the changes and identify opportunities to save on taxes.
Final thoughts
The 2024 UK tax changes bring a variety of adjustments that will impact the personal finances of workers, investors, business owners, and retirees alike. From the freeze on income tax thresholds to the drastic cut in the CGT and dividend allowances, it’s clear that many people will face an increased tax burden.
However, by planning and taking advantage of tax-efficient investment vehicles, pensions, and estate planning, you can minimise the impact on your personal finances. Understanding how these changes affect you and acting now to adjust your financial strategy is key to weathering the 2024 tax storm.
Whether you’re an employee facing higher tax brackets or a business owner grappling with corporation tax increases, taking proactive steps today could make all the difference in safeguarding your financial future. Make sure to stay informed, seek advice, and optimise your financial plans in light of these new rules.
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