6 frozen or reduced tax thresholds to know about in the 2024/25 tax year

17 April 2024

The 2024/25 tax year began on 6 April.

Starting from this date, the government has either reduced or frozen several tax allowances, exemptions, and thresholds, rather than increasing them in line with inflation.

Keep reading to learn about six key tax allowances and thresholds that have been fixed at their current rates or reduced in 2024/25, and learn how this could affect your tax bill.

1. The Capital Gains Tax Annual Exempt Amount

Capital Gains Tax (CGT) is usually due on profits from the sale of:

• Non-ISA holdings
• Second homes and very large properties
• Other personal belongings worth more than £6,000 (except your car)
• Business assets.

There is a CGT Annual Exempt Amount, within which your profits are usually tax-free.

On 6 April 2023, the government cut the CGT Annual Exempt Amount from £12,300 to £6,000. A year later, in the 2024/25 tax year, the government reduced it again to £3,000.

As it stands, this means you can earn £3,000 a year in profits from asset sales before paying CGT.

Notably, the government also cut the higher rate of CGT on the sale of second properties (such as holiday homes and buy-to-lets) from 28% to 24%, helping second homeowners, landlords, and commercial property owners to pay less tax when they sell up. The rate of CGT on non-property disposals remained at 20% for higher- and additional-rate taxpayers.

However, this cut might not make up for the shortfall created by the government’s Annual Exempt Amount reduction.

If you plan to offload non-ISA assets this year, you could pay more CGT than you would have paid before 6 April.

2. The Dividend Allowance

If you earn dividends as part of your remuneration, or have dividend-paying stocks in your investment portfolio, you could pay more Dividend Tax this year.

This is because the Dividend Allowance, under which you can earn dividends tax-free, has been cut in half.

In 2023/24 it stood at £1,000, but from 6 April 2024 it was reduced to just £500.

The reduction comes after the government halved the Dividend Allowance from £2,000 to £1,000 in April 2023 – meaning that in the space of two years, the Dividend Allowance has fallen by 75%.

3. The Inheritance Tax nil-rate bands

Inheritance Tax (IHT) has been a contentious subject for some years now.

Whatever your feelings about “Britain’s most hated tax”, it is important to know how much your family could pay if you were to pass away.

There are two tax-efficient “nil-rate bands”, which represent how much you can pass on without IHT being due on your estate.

They are:

• The nil-rate band, standing at £325,000
• The residence nil-rate band, an additional allowance for property passed down to direct descendants, standing at £175,000.

So, in theory, you can pass down up to £500,000 tax-free (if this includes family property) before your estate would attract any IHT.

Importantly, the government has implemented a freeze on the nil-rate bands in the 2024/25 tax year. In fact, the nil-rate band has not increased since 2009, and the residence nil-rate band has stayed the same since 2020.

What’s more, both are set to remain fixed at their current levels until 2028 – meaning that if the value of your estate continues to rise, a greater portion of it may be pulled into the taxable bracket.

4. The Income Tax Personal Allowance

The Income Tax Personal Allowance is the amount you can earn each year before Income Tax is due. As the 2024/25 tax year began, the Personal Allowance remained fixed at £12,570.

However, according to the Office for National Statistics (ONS), annual wage growth for UK employees (adjusted for inflation) was 1.4% for total pay, measured between November 2023 and January 2024.

So, if the Personal Allowance had increased in line with real terms wage growth based on the above measurement, it would stand at around £12,796 in 2024/25.

While this example would only mark a small increase in the tax-efficient Personal Allowance, the existing freeze means that more of your earnings could be subject to Income Tax in this financial year.

5. The income limit for the Personal Allowance

The Income Tax Personal Allowance is reduced by £1 for every £2 over £100,000 that you earn.

In simple terms, this means that your Personal Allowance normally disappears completely once your annual earnings reach £125,140.

What’s more, the government has kept the income limit for the Personal Allowance at its existing level for the 2024/25 tax year.

If your earnings have risen above £100,000, or are set to rise in the coming year, you could find that this freeze contributes to a greater proportion of your earnings becoming subject to higher Income Tax.

6. The additional-rate Income Tax threshold

As you may already be aware, the government implemented a reduction to the additional-rate (45%) Income Tax threshold in April 2023.

Previously standing at £150,000, you will now pay additional-rate Income Tax if you earn more than £125,140 a year.

Combined with the Personal Allowance freeze, along with the income limit for the removal of the Personal Allowance being fixed too, this means that high earners will likely see a further increase in their Income Tax liability this year if their earnings rise.

Get in touch to speak with a professional about tax mitigation strategies

While the reducing and freezing of key tax allowances and thresholds could be concerning, it is important to keep a cool head and take practical steps to protect your wealth.

One such step could be to discuss your tax burden with a financial planner.

We can help you form a tax mitigation strategy where possible, and stay in touch with you about any further changes the government may make over the long term.

Email info@depledgeswm.com or call 0161 8080200.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning or tax planning.

Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.