Year End Tax Review 2023/2024 – Blog 3 – Income tax planning

Tax Thresholds

Currently income tax rates and thresholds (except in Scotland) are set to remain unchanged for 2024/2025. The Personal Allowance (PA), below which income is not taxed, is £12,570. The higher rate threshold at which 40% tax kicks in is £50,270 and top rate tax (45%) begins when income exceeds £125,140.

Scotland has different tax rates and bands for non-savings, non-dividend income (e.g. employment income, business profits, rental income and pension income). In the recent Scottish Budget, the following were announced for 2024/2025:

• There will be a new ‘advanced’ tax rate of 45% that will apply to income between £75,000 and £125,140.
• The top rate of tax applying to income above £125,140 will be increased to 48% (from 47%)
• The 19% starter, 20% basic, 21% intermediate and 42% higher rates will be unchanged.
• The starter and basic rate thresholds will be increased by inflation to £14,876 and £26,561 respectively.
• The higher rate threshold will be frozen at £43,662.

Many Scottish taxpayers will now pay a significantly higher amount of tax than those elsewhere in the UK (although some lower earners pay slightly less than in the rest of the UK).

Personal Allowance (PA)

• The PA of £12,570 is progressively withdrawn for individuals earning more than £100,000, leading to a marginal rate of 60% on income between £100,000 and £125,140. This rate is different in Scotland and for those who have dividend income within this band.

Planning points

• Scottish taxpayers may wish to consider bringing forward income to 2023/2024 before the big increases in tax rates for higher earners (see above) take effect from 6 April 2024.

• Consider taking action to reduce taxable income, particularly where income falls just above one of the thresholds. There are various options to achieve this, including pension contributions and Gift Aid donations (see Blog 4).

• Income that can easily be moved from year to year includes:

• • a bonus from your company
  • dividends from your company
  • encashments of life assurance bonds
  • withdrawal of taxable income from pension schemes in ‘drawdown’.

Income can also be moved between spouses, in order to make sure that PAs and lower rate tax bands are utilised. This is not always easy to do, but the following methods are permissible:

• make an outright gift of investments that produce taxable income
• put savings and investments into joint names and share the income
• employ the spouse or partner in the other spouse’s or partner’s business
• take the spouse or partner into partnership

HMRC can challenge some of these methods if they think the transfer is not genuine. Always take tax advice to be sure that your plan will work.

If you have children, it may be possible to switch income from one spouse to the other (as discussed above), so that both spouses’ incomes remain below the £50,000 threshold for the High-Income Child Benefit Charge.

The information in this blog provides only an overview of HMRC guidance and legislation in force at the date of publication and no action should be taken without consulting the detailed HMRC guidance and legislation or seeking professional advice.  Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this blog can be accepted by the firm.