A range of new tax rates and tax-free allowances have come into force for the new tax year.
From 6 April, several changes have been ushered in. A cut to National Insurance, alterations to the capital gains tax allowance, dividend tax and the pensions lifetime allowance, plus a higher rate of state pension and child benefit, are all now in force.
“Households need to be aware of the new tax environment, because decisions they take now could leave them better or worse off when their tax position for 2024-25 is finally assessed,” says Henrietta Grimston, financial planning director at wealth management firm Evelyn Partners.
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“Moreover, some of the changes could mean that taxpayers incur new liabilities that mean they must complete a self-assessment tax return for the first time.”
The tax changes come on top of April bill increases, such as for council tax, water and broadband - although households will be pleased to know that most energy bills will fall due to a lower energy price cap.
We've run through seven key changes that have come into effect for the 2024/25 tax year.
1. Capital gains tax allowance has shrunk (again)
The CGT allowance was cut from £12,300 to £6,000 for the 2023/24 tax year, and the annual exemption halved again on 6 April this year to just £3,000.
It means someone with investment gains at the previous limit of £6,000 will pay an extra £300 in tax over the next 12 months if they are a basic-rate taxpayer, or £600 if they are a higher or additional-rate taxpayer.
The Treasury take from CGT has been growing rapidly: in the 2017-18 tax year the tax brought in £9.2 billion but in 2022-23 this had risen 84% to a record £16.9 billion.
“In an environment of rising asset prices and high inflation, households with investments or other assets held outside of tax wrappers need to be careful they don’t get caught out by the narrowing CGT exemption. There are a number of tactics that are useful for minimising CGT liability, although decisions must be weighed on an investment basis, with the tax outcome just part of the equation,” notes Grimston.
Tactics include moving investments into a stocks and shares ISA or pension, disposing of loss-making assets that can be used to offset against a capital gain that is potentially taxable, and switching assets to a spouse to use their allowance (and possibly pay CGT at a lower rate).
Higher and additional-rate taxpayers are subject to 20% on most assets (24% on residential property in 2024-25 - down four percentage points on the previous year) whereas basic-rate taxpayers pay as little as 10%.
2. The higher rate of capital gains tax on property has been cut
CGT used to be applied at 28% on second homes or buy-to-lets for higher-rate taxpayers. But, as of 6 April 2024, that rate fell to 24%. The basic rate for CGT on residential properties remains unchanged at 18%.
According to the investment platform AJ Bell, it means a higher-rate taxpayer with a £100,000 gain on their property will pay £3,880 less in tax over the next year than they otherwise would have, while someone with a £50,000 gain will pay £1,880 less in tax.
However, the shrunken capital gains tax allowance will hurt those with more modest gains - for those sitting on a property gain of less than £24,000, the reduction in the CGT rate to 24% does not offset the impact of the halving of the annual exemption, says Evelyn Partners.
Grimston comments: “For those who are looking at property as an investment beyond their main residence, the CGT rate on residential property remains 4% higher than the rate applied to most other asset classes, meaning that property investments need to return more in terms of capital growth to ensure post-tax returns are competitive with, say, a portfolio of equities.”
Cutting the higher CGT rate was announced in the Spring Budget. The measure is intended to “encourage landlords and second homeowners to sell their properties, making more available for a variety of buyers including those looking to get on the housing ladder for the first time”, according to the Treasury.
3. The dividend allowance has halved (again)
The annual allowance for dividends has halved again for the 2024-25 tax year. It is now just £500, having already been cut from £2,000 to £1,000 in the 2023/24 tax year. The dividend allowance was £5,000 as recently as 2017-18.
Laura Suter, director of personal finance at AJ Bell, says: “The cut will mean that from April an additional-rate taxpayer who has more than £1,000 of dividends will pay £197 a year more in tax than this tax year, while a basic-rate taxpayer will face an extra £44 on their annual tax bill.”
She adds: “This tax only applies to investments outside a pension or ISA, so moving your money into one of these tax-free accounts is your best way to reduce your tax bill. You can always transfer some assets to your spouse to make use of their tax-free and ISA allowances too.”
Grimston points out that dividend tax is “significantly greater for higher and additional-rate taxpayers (at 33.75% and 39.35% respectively) than it is for basic rate (8.75%), so the tax warning lights should be flashing for that cohort going into the 2024/25 tax year.”
4. National Insurance has been trimmed
Millions of workers will see a National Insurance (NI) tax cut in their April paychecks, which could be worth hundreds of pounds a year.
From 6 January, the main rate of class 1 NI contributions deducted from employees' wages was reduced from 12% to 10%. From 6 April, that rate dropped again to 8%. For the self-employed, the main rate of class 4 NIC has been reduced from 9% to 6% while class 2 NIC is no longer due.
Someone on a £35,000 salary will save around £450 a year thanks to April’s cut, while those earning more than £50,270 will save £750 a year, according to AJ Bell. However, fiscal drag is likely to mean you're paying more tax overall.
5. Pension lifetime allowance has been abolished - for real
The pension lifetime allowance has now officially been scrapped. Last year, chancellor Jeremy Hunt ditched the lifetime allowance tax charge for pension savers that breach the £1,073,100 total limit that can be held in pension pots.
However, some awkward legacy rules remained. From the 2024-25 tax year, the allowance has been fully abolished.
Two new main allowances that have been introduced for pension savers - the lump sum allowance and the lump sum and death benefit allowance – as well as a third, relating to overseas transfers. Suter says: “The lump sum allowance, or the tax-free lump sum limit people can take from their pension, [is] set at £268,275, and the lump sum and death benefit allowance [is] set at £1,073,100.
“These allowances are designed to limit the pension tax-free lump sums people can receive during their lives and the tax-free lump sums they can pass onto beneficiaries when they die,” adds Suter.
Axing the lifetime allowance has been welcomed by many pension savers, with some rejoining workplace pension schemes to take advantage of employer contributions again. However, savers will also be feeling unnerved by Labour’s objection to the measure and uncertainty over whether scrapping the allowance could therefore be reversed by a future government.
6. State pension has increased to £11,500 a year
Retirees have received an inflation-busting 8.5% boost to their state pension this month. The full new state pension has gone up almost £20 a week to £221.20. This adds up to £11,502 over a year, compared to the previous £10,600 annual entitlement.
Meanwhile, the full basic state pension has also risen to £169.50 a week, from £156.20, amounting to £8,814 a year. The increase officially took place on Monday (8 April).
7. Child benefit has been extended and increased
The rules around child benefit changed on 6 April. It means a parent earning between £50,000 and £80,000 now receives some or all of the benefit.
The chancellor announced in last month’s Spring Budget that the threshold where you start to lose child benefit payments will increase from £50,000 to £60,000 for the 2024/25 tax year. This means if the highest-earning parent earns between £50,000 and £60,000 a year they should be able to keep all of their child benefit.
In addition, families will now continue to receive some child benefit up to when the highest earner earns £80,000. Previously the cut-off was £60,000.
Suter explains: “A parent earning £60,000 wasn’t eligible for any child benefit, but as a result of the changes they will now get the full amount from 6 April.”
She adds: “The catch is that the benefit is based on both parents’ income – meaning if either of you earns more than the thresholds you’ll lose entitlement to the benefit. Families also need to claim the child benefit, they won’t automatically receive it, so anyone who is now eligible needs to fill out some paperwork and do battle with HMRC’s systems.”
The rate of child benefit has also increased. Families with one child will now receive up to £1,331 a year – an annual increase of £83.20 - and up to £881 a year per additional child, representing a rise of £54.60. There is no limit to how many children families can claim for.
Parents will get £102.40 every four weeks for the first or only child and £67.80 every four weeks for each additional child.
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