Personal Income Tax
Tax rates and allowances – 2024/25 (Click Link – Page 2)
The Autumn Statement included the announcement that the main personal allowance and the 40% threshold will remain at their 2022/23 levels until the end of 2027/28. This represents a tax increase where income rises from year to year. For example, a person with a salary of £50,270 would pay £7,540 in income tax in 2023/24; if their income increases by 10% to £55,297 in any of the years to 2027/28, all of the increase will be taxed at 40%, and they will pay £9,551.
The income level above which the personal allowance is tapered away remains £100,000; it will be reduced to zero when income is £125,140, which is also the threshold for paying 45% tax. In the tapering band, the loss of tax-free allowance creates an effective marginal rate of 60%. Once again, annual increases in income will bring more people into these higher rates.
High Income Child Benefit Charge (HICBC)
The HICBC continues to apply to the higher earner of a couple where one receives Child Benefit and either of them has income of more than a set threshold. For 2024/25, for the first time since the charge was introduced in 2012/13, the threshold has been raised from £50,000 to £60,000; the band of income over which the clawback is calculated has also increased from £10,000 to £20,000 (1% of the total benefit for every £200 of income), so that the whole benefit is lost when income reaches £80,000 (£60,000 in 2023/24). The HICBC is one reason that an individual might have to register for self-assessment and file a tax return.
The Chancellor announced plans to reform the HICBC from April 2026 to take into account the combined income of the household, rather than just the higher earner. This will reduce the unfairness of clawing back nothing from a couple each earning £59,000 (in 2024/25), compared to full clawback where one of the couple earns £80,000. However, it is not a straightforward change because it will require HMRC to have the power to consider the income of the couple rather than as two individuals.
Scottish rates and allowances – 2024/25 (Click Link – Page 2)
The Scottish government has the power to set its own income tax rates for Scottish taxpayers for non-savings, non-dividend income. In its Budget in December 2023, the following were announced for 2024/25:
- A new ‘advanced’ tax rate of 45%, applying 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, with the higher rate threshold frozen at £43,662.
Many Scottish taxpayers will now pay a significantly higher amount of income tax than those elsewhere in the UK, although some low earners will pay less.
The Welsh Government has similar powers for Welsh taxpayers but has not varied the main UK rates.
Dividend income
The dividend allowance exempts some dividend income from tax, although that income still counts towards the higher rate thresholds. For 2024/25, the allowance is reduced from £1,000 to £500 (it was £2,000 up to 2022/23). This increases the tax liabilities of those with dividend income above the threshold, and will also require more people to file tax returns to declare tax liabilities which previously would have been covered by the allowance.
The tax rates on dividend income over £500 remain unchanged from the tax year 2022/23. The ordinary rate, paid by basic rate taxpayers, is 8.75%, the upper rate is 33.75%, and the additional rate is 39.35%. These rates apply across the UK.
The 33.75% rate also applies to tax payable by close companies (broadly, those under the control of five or fewer shareholders) on ‘loans to participators’ that are not repaid to the company within 9 months of the end of the accounting period.
The reduction in the dividend allowance and the increase in the tax rates increases the relative attractiveness of holding shares in a tax-free ISA or in a Venture Capital Trust. Dividends arising in an ISA or a qualifying VCT are not taxed and do not count towards the allowance.
Savings income
The savings allowance remains £1,000 for basic rate taxpayers, £500 for 40% taxpayers and nil for 45% taxpayers. Higher interest rates are likely to mean more people have savings income above these limits and will have to declare them in order to pay tax.
The savings rate band remains at £5,000. Non-savings income is treated as the ‘first slice’ of income, using the tax-free allowance and the savings rate band; if any of the £5,000 band is not used by non-savings income, any savings income falling within that band is taxed at 0%.
Foreign domiciled individuals
Individuals who are classed as ‘not UK domiciled’ (often referred to as ‘non-doms’) enjoy a number of tax advantages in relation to foreign income and gains, which will only be taxed if the money is brought to the UK (if the individual claims the ‘remittance basis of taxation’). Some of these advantages have been restricted in recent years, but the Chancellor has now announced that the system will be reformed and replaced with effect from 6 April 2025.
Individuals who have not been UK resident in the last 10 years, who become UK resident after that date and opt into the regime, will be exempt from income tax on their foreign income and gains for four years. After that, they will be taxable on the same basis as other UK residents.
There will be transitional rules for those non-doms who are already resident in the UK. They may be able to bring accrued income and gains to the UK at a reduced tax rate, and may rebase their foreign assets to their 2019 values in order to calculate taxable gains.
The government also intends to move to a residence-based regime for Inheritance Tax, and plans to publish policy and technical consultations on these changes later this year.
These are complicated rules, the details of which have not yet been published. Anyone affected by them should take advice and make sure they understand the opportunities and potential pitfalls.
