Income Tax Planning in 2025: How to make the most out of opportunities

When it comes to year-end tax planning, consideration should be given to the different areas of income tax to ensure all allowances are maximised.

We look into the rates and allowances available for the current tax year.

Please note that the thresholds and rates are different for Scottish taxpayers, and these can be found here.

Rates and allowances

The tax-free personal allowance for the 2024/25 tax year is £12,570, the same as in 2023/24.

The next £37,700 is taxed at the basic rate of 20% (8.75% for dividend income).

Higher rate tax of 40% (33.75% for dividends) is charged on income above £50,270 and additional rate tax (ART) of 45% (39.35% for dividends) is charged on income above £125,140.

Note that dividends are treated as the top slice of income, so the basic and higher rates are first allocated against other incomes.

Under current guidance, the allowances remain at the above levels until the 2027/28 tax year.

The personal allowance is reduced by £1 for every £2 of income above £100,000. There is therefore no personal allowance at all where income exceeds £125,140. Therefore, the effective rate of tax on income between £100,000 and £125,140 is 60%. This means that the effective rate of tax relief on pension contributions and gift aid donations is 60% within this income band.

Gift aid and pensions

Sufficient gift aid donations and/or personal pension contributions can be made, where possible, to mitigate the impact of the tapering of the personal allowance.

Dividends

You should consider whether sufficient income can be generated to fully utilise the personal allowance and basic rate band. This may be done by careful planning of the timing of dividends from a private company or distributions from a family trust.

The personal savings allowance entitles basic rate taxpayers to £1,000 of tax-free savings income and higher rate taxpayers £500. However, additional rate taxpayers receive no allowance. The dividend tax allowance of £500 is available for all taxpayers.

Amounts falling within the dividend allowance are taxed at 0%. The allowance will, however, use any part of the lower rate bands that they would otherwise have fallen into.

You may also get up to £5,000 of interest and not have to pay tax on it if you qualify for the starting rate for savings. You’re not eligible for the starting rate for savings if your other income is £17,570 or more.

Interest and dividends in ISAs will continue to be entirely tax-free.

Dividends can be taken prior to 5 April 2025 to utilise the dividend allowance if not already done so.

Married couples

Married couples or civil partners can sometimes transfer 10% of their personal allowance between them by making an election. Tax relief is given via a tax reduction of 20% of the transferred amount, £1,260 for 2024/25.

This transfer is only available if one party is a non-taxpayer and the other is a basic-rate taxpayer. To get the full benefit the non-taxpayer must have an income of £11,310 or less.

It should be remembered that children also have tax free allowances that may be utilised, subject to considering the settlements legislation.

Grandparents’ income

There is potential to divert income from grandparents or other relations (not parents), in order to utilise a child’s personal allowance. This can be achieved by creating a family trust as part of an Inheritance Tax planning exercise. Professional advice should be sought before undertaking this.

If you or your partner receive child benefit, it is important to remember that taxpayers with an adjusted net income in excess of £60,000 are liable to the high-income child benefit charge.

The charge will be levied on the higher earning partner. The charge is 1% of the full child benefit award for every £200 income between £60,000 and £80,000. Where income is more than £80,000, effectively all child benefits are lost. You can elect not to receive child benefit if you or your partner prefer not to pay the charge.