Tax Planning

Tax efficiency and income planning

Generating your retirement income in a tax efficient manner can help increase your returns and extend how long your funds will last.  It is important to not only consider your income tax position but also other taxes to which you may be subject; such as capital gains tax and inheritance tax.

Pension funds are now far more accessible and you should consider how your capital is invested and how your retirement income needs are addressed. Retaining as much money as possible in the tax efficient wrappers of a pension and ISA will make the most of your returns. Available tax allowances and reliefs should also be utilised where possible and all sources of income should be considered for efficient tax planning.

The diagram below shows the tax effect of drawing money from regular savings accounts, ISAs and pension funds:

Pension Commencement Lump Sum (PCLS): a tax-free cash lump sum taken from your pension fund.

Tax-free cash lump sum

The pension freedoms allow those aged 55 and over to take as much income as they want from a defined contribution pension fund whenever they want it. Usually up to 25% can be withdrawn tax-free with the rest being taxable as earned income.

However, this may affect your tax rate; particularly if you are in receipt of other income for that tax year, so it may be beneficial not to access pension funds immediately, instead drawing money from other less tax efficient savings pots.

Receipt of tax free cash lump sums may also have an impact on any means-tested benefits you receive.

Make the most of tax allowances

We believe it is important for you, as an investor, to understand the implications of tax as it can affect the total returns of your investment.

Please see below an outline of some of the main tax updates for the 2024/25 tax year and what they could mean for you.

Income tax (England, Wales & Northern Ireland)

Income tax (Scotland)

The Scottish Government set out its spending and taxation plans for 2024/25 in its annual budget:

*your Personal Allowance may be greater than £12,570 if you claim Marriage Allowance or you are eligible for the Blind Person’s Allowance.  It can also be reduced for high earners (earning more than £100,000) and is zero if your income is £125,140 or above. Those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000.

Dividend tax allowance

You only have to pay tax if your dividends exceed the dividend tax allowance in the tax year which for 2024/25 is £500. However, you don’t pay tax on dividends from shares in an ISA.

The tax you pay depends on your income band – please note, you must add your dividend income to any other taxable income to determine the rate of tax you will pay.

Capital Gains Tax (CGT)

Capital Gains Tax is a tax on a profit made when you sell certain assets (such as shares, OEICs, second properties) that have increased in value. You are only taxed on the gain you make, not the amount of money you receive.

The CGT allowance for 2024/25 has reduced to £3,000 but the rates of tax remain unchanged:

Inheritance tax

The inheritance tax threshold (also known as the nil rate band) is £325,000 and the standard inheritance tax rate is 40%. Tax is only charged on the part of your estate that is above the threshold.

** In addition to the standard nil rate band a residence nil rate band (RNRB) was introduced in April 2017. This is available when residential property is left to direct descendants. Just like the standard nil rate band, any unused RNRB on the first death of a married couple or civil partners has the potential to be transferable even if the first death occurred before 6 April 2017.  However, the RNRB does come with conditions attached and so may not be available, or available in full, to everyone.

Personal savings allowance

This was first introduced in 2016 and although the rates have not changed, a generous £1,000 allowance for basic rate tax payers means that most people will no longer pay tax on their savings interest.