Today marks the first working day of the new 2024/25 UK tax year. This post will focus on income tax, the largest contributing tax head to overall UK tax revenue, at 25%.
For individual tax-payers, a couple of key changes made that will affect the 2024/25 tax year include the CGT and dividend allowance both halving for the second year in a row, pushing both allowances down an effective 75% in two years. The personal allowance has remained unchanged for two tax years in a row at £12,570, whilst inflation has accelerated. The effect is less tax relief for individuals.
Some consolation is the reduction in National Insurance contributions and the introduction of the British ISA which enables individuals to contribute an additional £5,000 on top of the existing £20,000 allowance, provided the funds are invested in British companies.
Total taxes as a percentage of GDP are forecast to reach 37.3% in 2024/25, up from 35.3% in 2022 when the UK was ranked 16th out of the 38 OECD member countries. According to Statista, UK tax receipts in 2022/23 were £787bn, up 27% from £621bn in 2019/20, before COVID. Corporation tax rate increased from 19% to 25% in April 2023, whilst VAT is at 20%.
With higher income taxation through reduced CGT and dividend allowances, combined with higher living costs all around, higher rents, as well as expected hikes in charges from utility service providers, it looks to be another tough year for taxpayers.
Or will the reduction in NI taxes and increased ISA allowance be enough to stimulate the economy?
Summary of the main 5 changes
- Cuts to National Insurance
First some cheer, in that Class 1 employee NI will be cut from 10% in January to 8%, down from 12% in prior years. For a higher rate taxpayer earning over £50,270, this results in annual savings of £754. NI remains at 2% for income over £50,270. For an employee earning an annual salary of £90,000 per year their NI is £3,811, compared to £5,679 in 2021/22, a saving of £1,868 which gives some respite to coping with higher living costs. Class 4 NI which affects the self-employed, drops from 9% to 6% on earnings between the lower profits limit of £12,570 and £50,270, resulting in savings of £1,131 for someone earning £50,270 or above.
But there’s no such thing as a free lunch. The reduction in NI will be funded by an increase in other forms of income tax such as CGT and dividend tax.
2) CGT tax allowance will halve
Back when I was doing my ACCA UK-tax exams, the CGT annual exemption was £12,300 per year. The annual exemption means that if you had a taxable gain, say you sold a property for a profit, the first £12,300 of this gain would be exempt from capital gains tax. However, in the 2023/24 tax year, this was reduced by more than half to £6,000, and in current 2024/25 tax year starting Saturday, it will halve again to £3,000. The CGT rates are 20% for higher rate taxpayers (those with earnings more than £50,270 per year) and 10% for those earnings less. CGT on second properties are taxed at 28% and 18% respectively which has not changed.
Given the large gains seen by some classes of assets in recent years, such as property, reducing CGT allowances will result in a bigger proportion of these gains flowing to treasury. I was speaking to a friend recently whose family bought a flat for around £400,000 in the 1990s, and is now worth £2.2m. The CGT element of a sale here would be massive. The net effect of this reduction in CGT allowance is more CGT to be paid by taxpayers who dispose of assets for a profit leading to less disposable income in aggregate.
3) Dividend allowances will halve
Another change from the Treasury is that the annual dividend allowance will be halved from £1,000 to £500 per tax year. Again, going back to when I was doing my ACCA taxation studies, the annual dividend allowance was £2,000 per taxpayer. This was reduced to £1,000 during the 2023/24 tax year, and has now been halved again to £500 during the 2024/25 tax year, an effective 75% drop in two years.
If we look at an investor who earns £500 in dividends per year outside of an ISA, which pays a dividend yield of 4%, this implies the investor can hold a portfolio of shares worth £12,500 and not pay any dividend tax on the dividends earned, whereas in 2022, £2,000 of dividends at a dividend yield of 4% implied a holding of £50,000. This disincentivizes owning shares outside of an ISA structure.
4) Annual ISA contributions increase to £25,000
There are several different types of ISAs, but I’ll discuss two types here, the cash ISA and stocks and shares ISA.
ISAs (Investments and Savings Accounts) are tax efficient ways for residents of the UK to save or invest money, by enabling them to save or invest up to £25,000 per tax year without paying any tax on the income, dividends or capital gains that the investments generate. This is an increase of £5,000 from last tax year, although the additional £5,000 must be invested into UK companies.
Cash ISAs relate to savings products where investors earn interest, whilst stocks and shares ISAs relate to securities where investors can invest in shares of companies, unit trusts, investment funds, and bonds, to earn a combination of dividends, interest e.g. from bonds and capital gains.
It is a very small component of the UK population that would be able to invest their whole allowance every year into the ISA, so the net effect of the British ISA £5,000 allowance remains to be seen.
5) Personal allowance to remain at £12,570
The personal allowance will remain flat at £12,570, largely unchanged since 2021/22. Given this hasn’t kept up with cost and wage inflation, it means most taxpayers are paying a lot more tax now, either by being pushed into higher salary brackets, or by paying more tax at a higher rate.
In conclusion, the 2024/25 tax policies don’t look to be pro-growth. Government tax receipts are up 27% since 2019/20 to fund government spending, but GDP growth is very slow, growing by only 1% during the past 5 years, resulting in the tax burden increasing considerably. The personal allowance is flat, whilst the CGT and dividend allowances are down 75% in two years. Some gain has come from a reduction in NI, which will partly be funded by the increase in other income taxes.
However, as always, there are some strategies for mitigating the effects of these higher taxes, and trying best to influence what’s in the realm of our control, and this primarily relates to maximizing use of ISAs.