Why it is important to be proactive with your tax planning at the start of the 2024/25 tax year

While we may only be a short way through the 2024/25 tax year, yet getting well ahead of next year’s deadline on 5 April 2025 can be an effective strategy.

From pensions and ISAs to making the most of allowances and exemptions, and filing paperwork, find out why early tax planning can be constructive, and how working with a professional can help.

Using your ISA allowance early could boost your returns

When the new tax year begins, one of the main opportunities you can make the most of is your ISA allowance.

Standing at £20,000 in 2024/25, this is the amount you can contribute to your ISAs in a single tax year. Your savings and investments are then shielded from Income Tax, Capital Gains Tax (CGT), and Dividend Tax.

Many people rush to make the most of what is left of their ISA allowance when the end of the tax year is approaching. Yet actually, it can pay to make the most of your ISA allowance early in the year, because your money is invested for longer.

As figures published in the Times Money Mentor show, had you started investing £5,000 on the first day of the tax year for 20 years starting in 1999, you would have around £19,000 more than someone who invested the same amount on the last day of the tax year.

The reason for this is simply that your money would be invested for an additional 11 months compared to investing on the last day, showing that the sooner you put your money in the market, the better.

So, you could boost your returns by investing in an ISA earlier in the year.

You might need to think carefully about using your allowances and exemptions this year

It is also worth carefully planning around how you make use of specific tax allowances and exemptions. In particular, two that you might need to think about in 2024/25 are the CGT Annual Exempt Amount and the Dividend Allowance, as these both halved on 6 April 2024.

The CGT Annual Exempt Amount (£3,000 in 2024/25, down from £6,000 in 2023/24) allows you to realise gains in certain assets without facing a tax charge on your profits.

To make the most of this exemption, you could tactically sell certain assets and take the gains so that you do not have to pay tax on them. As discussed previously, holding eligible investments in an ISA also means they are exempt from CGT.

Meanwhile, the Dividend Allowance (£500 in 2024/25, down from £1,000 in 2023/24) allows you to earn tax-free dividends, whether that is from investments or business interests.

While you cannot do much about the dividends you receive from your investments (other than holding them in an ISA to make them tax-efficient), you can control the dividends you extract from your own company, carefully doing so to make withdrawals as tax-efficient as possible.

Planning around these thresholds can help you mitigate the tax you might have to pay this year.

You could make the most of your pension Annual Allowance

Another key threshold that resets at the start of the tax year is your pension Annual Allowance. This is the maximum amount you can tax-efficiently contribute to your pension in a single tax year, standing at the lower of £60,000 or 100% of your earnings in 2024/25.

Making pension contributions early in the year – or at least planning how you will make your contributions throughout the next 12 months – can help ensure that you fully capitalise on the Income Tax relief you can receive.

The Annual Allowance increased from £40,000 to £60,000 on 6 April 2023, yet data shows that many high net worth (HNW) individuals are not making the most of this higher amount. Indeed, according to FTAdviser, only 8% of HNW individuals make contributions up to the £60,000 allowance, and 56% are not making use of the additional £20,000 added at the start of the 2023/24 tax year.

So, by starting to plan now, you can develop a strategy that allows you to make the most of the higher allowance.

Bear in mind that your Annual Allowance may be lower if your earnings exceed certain thresholds or you have already flexibly accessed your pension. You may also be able to carry forward unused Annual Allowance from up to the three previous tax years.

These calculations can be complex, which is why it can be so useful to work with a tax professional.

It could be sensible to get ahead of the 2024 general election with your tax planning

One other factor to consider with this tax year in particular is getting ahead of the general election, set to occur before the end of the year.

Ipsos polling data shows that Labour leads on economy and public services, with the popularity of the Conservatives falling to record lows.

If the Labour party was to win the election and form a government, it could implement changes that could affect you, particularly relating to tax and pensions.

One such change could be the reintroduction of the pension Lifetime Allowance (LTA), which was abolished at the start of the 2024/25 tax year.

Previously, you would have faced an additional tax charge of up to 55% when withdrawing funds from your pension in excess of the LTA threshold, which stood at £1,073,100 at last count.

However, if elected, Labour has indicated that it could reinstate the LTA. So, in the meantime, it could be sensible to contribute more to your pension – it is unlikely that you will retrospectively face tax on your contributions if the new government were to put another cap on tax-efficient saving in future.

Mistakes can prove costly when submitting your tax return

A significant benefit of early planning is that it can also help you avoid making costly mistakes on your tax return.

Your self-assessment tax return for the 2023/24 tax year will be due by 31 January 2025 if you are submitting online. Starting to calculate what you will owe now can help ensure you will meet this deadline, giving you plenty of time to precisely work out your tax liability for the previous year.

Getting into the habit of this meticulous, forward-thinking approach will also serve you well in future tax years. That way, you can mitigate your tax bill as far as possible, while also always meeting the payment deadline for what you do owe.

Get in touch

If you would like support with your tax planning from a Chartered financial planning firm, we can help at Rosebridge, please get in touch. 

Ramsbottom office: Email enquiries@rosebridgeltd.com or call 01204 300010

Chester office: Email enquirieschester@rosebridgeltd.com or call 01244 569141

Leeds office: Email enquiriesleeds@rosebridgeltd.com or call 0113 243 7100

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 tax planning.