Navigating Personal Taxation in 2024/25: A Detailed Guide
As the new tax year approaches, understanding the intricacies of personal income tax rates, allowances, and thresholds is essential for effective financial planning. At Pearson McKinsey Limited, we’re here to help you navigate the complexities of the UK tax system. Below, we’ve provided a thorough breakdown of the key updates and what they mean for you.
Personal Allowance and Tax Thresholds
The personal allowance for 2024/25 remains at £12,570, meaning most individuals can earn up to this amount tax-free. However, this allowance is not universal. If your income exceeds £100,000, your personal allowance will be reduced by £1 for every £2 earned above this threshold. Once your income reaches £125,140, the personal allowance is eliminated entirely.
It’s important to note that the government has frozen the personal allowance and key tax thresholds until April 2028. This means that as incomes rise over time, more individuals may find themselves moving into higher tax brackets—a phenomenon known as fiscal drag.
Income Tax Rates and Bands
For taxpayers resident in England, Wales, and Northern Ireland, the income tax bands for 2024/25 are as follows:
| Income Threshold (2024/25) | Tax Rate (Excluding Dividends) | Dividend Tax Rate) |
|---|---|---|
| £0 – £12,570 (Personal Allowance) | 0% | 0% |
| £12,571 – £50,270 (Basic Rate) | 20% | 8.75% |
| £50,271 – £125,140 (Higher Rate) | 40% | 33.75% |
| Over £125,140 (Additional Rate) | 45% | 39.35% |
Key Notes:
- The 0% starting rate for savings income applies if your total taxable non-savings income (e.g., earnings, pensions) is less than the personal allowance (£12,570). In this case, up to £5,000 of savings income may be taxed at 0%, provided your total income (non-savings + savings) does not exceed £17,570.
- If your non-savings income exceeds the personal allowance, the 0% starting rate for savings income does not apply, and your savings income will be taxed at your marginal rate (e.g., 20%, 40%, or 45%).
- Dividends are always treated as the top slice of income and taxed at your highest marginal rate.
- A £500 dividend allowance applies, meaning the first £500 of dividend income is tax-free. This does not apply to dividends from shares held within an Individual Savings Account (ISA).
Trusts and Income Tax
The income tax rates for trustees vary depending on the type of trust:
- Accumulation or Discretionary Trusts: The first £1,000 of income is taxed at 20% (or 8.75% for dividends). Income above this threshold is taxed at 45% (or 39.35% for dividends).
- Interest in Possession Trusts: Income is taxed at 20% (or 8.75% for dividends). If income is mandated to the beneficiary, it is taxed on the beneficiary’s tax return.
Trustees do not qualify for the dividend allowance, and special rules apply to non-resident trusts, settlor-interested trusts, and trusts for vulnerable individuals. Given the complexity of trust taxation, professional advice is highly recommended.
Changes for Non-Domiciled Individuals
The Autumn 2024 Budget announced significant changes to the tax regime for non-domiciled individuals, effective from 6 April 2025. Here’s what you need to know:
- Abolition of the Remittance Basis: The current remittance basis of taxation will be abolished. From April 2025, UK tax liability will be determined solely by residency status, not domicile.
- New Four-Year Rule: Individuals who have been UK tax residents for more than four years will be taxed on their worldwide income and gains.
- Foreign Income and Gains (FIG) Regime: New arrivals to the UK will benefit from a four-year FIG regime, allowing them to bring foreign income and gains into the UK tax-free, provided they have been non-resident for the previous ten years.
- Temporary Repatriation Facility (TRF): A three-year window (2025/26 to 2027/28) will allow historic unremitted income and gains to be brought into the UK at reduced tax rates of 12% (for the first two years) and 15% (in the third year).
Remittance Basis of Taxation (Until 5 April 2025)
Until the new rules take effect, non-domiciled individuals can still claim the remittance basis of taxation, which taxes only income and gains remitted to the UK. However, claiming the remittance basis comes with certain conditions:
- Remittance Basis Charge (RBC): Individuals who have been UK-resident for 7 out of the last 9 years must pay an annual charge of £30,000 to use the remittance basis. This increases to £60,000 for those resident for 12 out of the last 14 years.
- Loss of Allowances: Claiming the remittance basis means forfeiting the personal allowance and capital gains tax annual exemption.
Domicile Status and Taxation
Domicile status remains a key factor in determining tax liability until April 2025. There are three types of domicile:
- Domicile of Origin: Acquired at birth, usually following the father’s domicile.
- Domicile of Dependency: Applies to minors and changes with the domicile of the person they are dependent on.
- Domicile of Choice: Acquired by settling in another country with the intention to remain there permanently.
From 6 April 2025, domicile will no longer determine tax liability. Instead, residency status will be the sole factor.
Formerly Domiciled Residents (FDRs)
Individuals born in the UK with a UK domicile of origin who return to the UK after acquiring a domicile of choice elsewhere are subject to specific rules:
- They have a one-year grace period before their worldwide assets become subject to UK inheritance tax (IHT).
- They are subject to income and capital gains tax on the arising basis for any tax year they are UK resident.
- Trusts set up by FDRs while non-UK domiciled are now within the scope of UK IHT.
Remittances and Mixed Funds
A remittance occurs when foreign income or gains are brought into the UK. Examples include:
- Transferring cash or bank balances to the UK.
- Using non-UK funds to settle UK liabilities or credit card debts.
- Bringing assets purchased with untaxed foreign income or gains into the UK.
For mixed funds (accounts containing a mix of capital, income, and gains), complex statutory ordering rules apply to determine the tax treatment of remittances.
Planning Ahead
With the upcoming changes to the tax regime, especially for non-domiciled individuals, it’s crucial to review your financial arrangements and seek professional advice. Whether you’re a UK resident, a trustee, or a non-dom, understanding these changes will help you minimise your tax liability and plan effectively for the future.
At Pearson McKinsey Limited, we specialise in providing tailored tax advice to individuals and businesses. If you have any questions or need assistance with your tax planning, don’t hesitate to reach out to us.
Call us at: 020 8520 8442
Email us at: info@pearsonmckinsey.co.uk
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Disclaimer: This blog is for informational purposes only and does not constitute financial or tax advice. Please consult a professional advisor for personalised guidance.