6 Mins
As we approach the end of the 2024/25 tax year, now is the time to consider your tax planning options. This is especially important for those impacted by the recent proposed inheritance tax changes announced in the budget. You can find our tax planning guide here for further information. Alternatively, please get in touch, our team would be happy to help with any queries.
Tax Planning – why is it important
With the end of the tax year approaching, it is the perfect time to look at the tax efficiency of your finances and consider whether you might benefit from tax planning. Many types of people, not just high net-worth individuals, can benefit from good tax planning.
The UK tax system offers a number of deductions, allowances and reliefs than can be used to lower your tax liability. For example, all individuals are entitled to a personal allowance, savings allowance, and dividend allowance. The personal allowance is tapered when income exceeds £100,000 but there is a way to reinstate all or some of the personal allowance by making gift aid donations and/or personal pension contributions as they reduce your income when calculating the availability of the personal allowance. In addition to this, they extend your basic rate band meaning more income is taxed at the basic rate.
There are also several tax-efficient ways to save and invest. Individual Savings Accounts (ISAs) allow you to save or invest up to £20,000 per year tax-free and investments in VCTs or EIS/SEIS companies will give you a tax reducer.
Most of these planning points can be done at any point but pension contributions must be made in the tax year that you want relief for. Please note, there is a limit on the amount of pension contributions that can receive relief in a tax year, and this must be considered before making additional contributions.
With the changes to Inheritance Tax (IHT) announced in the 2024 Autumn budget, in particular pensions possibly becoming subject to IHT from April 2027, more people than ever before may have taxable estates, so it is even more important to review your estate and IHT position. There are a number of methods to reduce the value of your estate for IHT which include making gifts during your lifetime, examining the availability of IHT reliefs, or setting up a trust to help plan for the next generation.
Business owners should review tax planning annually, in particular the ways in which they extract funds from the business, This year with the changes to national insurance, this is even more important to review in detail.
More details on the different types of tax planning can be found in our 2025 Tax Planning Guide.
Scottish or rest of UK taxpayer – how status is determined
One of the questions we are most frequently asked is what determines who is a Scottish taxpayer. If you work in England but live in Scotland, can you be taxed as a UK taxpayer rather than Scottish? If you work for a firm based in England but live in Scotland, can you be taxed as a UK taxpayer? The Scottish Government has had the power to set their own income tax rates for non-savings income (employment, pensions and rental income) since April 2016. This means Scottish taxpayers pay Scottish income tax instead of the standard UK tax rates but many people are still unsure of the rules and how to know if they are to be taxed at the Scottish rates of the UK rates.
For many people it will be simple, if you live full-time in Scotland and you work in Scotland, you are a Scottish taxpayer, taxable at the Scottish rates of tax. If you spend time elsewhere in the UK or work elsewhere in the UK, a Scottish taxpayer is determined by a number of factors to see if you have a “close connection” to Scotland. Essentially where is your home (not where you spend most nights but your home)?
An individual would have a close connection if:
- They have a single place of residence in 1 country or;
- They have more than 1 residence however there is a clear main residence (i.e. they spend most of their time in a specific residence). A main residence does not need to be owned, it can be rented
The location of an individual’s home is not the only factor to consider. If you have two or more homes, HMRC will look at the following:
- Where you spend the most time, for example, if you sleep in one home more nights than the other.
- Where you have stronger personal ties. These include where your family lives, where you are registered with a doctor or where you are registered to vote. The family tie is often the deciding factor. If you work elsewhere in the UK but your spouse and children are in Scotland, the home you share with them will be seen as your main residence.
- Where any children go to school
- Where your social life is based, and/or have a strong community connection.
The most common scenario we are asked about is where one spouse works elsewhere in the UK, usually in London, while the other spouse and children remain in Scotland. Despite sometimes spending more days in London at work than at home over the duration of the year, as the family are in Scotland, the main home is in Scotland and they are a Scottish taxpayer.
National Insurance changes impact on state pension entitlement
The government announced in the recent budget that the employers class 1 NIC threshold is reducing to £5,000 from 6 April 2025. This reduction could impact employees/directors’ entitlement to a state pension where remuneration planning has been undertaken. To receive a full state pension, employees/directors must have 35 qualifying years. A qualifying year is a year where individuals:
- Are working and making sufficient national insurance contributions
- Receive national insurance credits
- Pay voluntary national insurance contributions
Prior to the budget, it may have been advantageous for employees to take a salary up to the level at which the employer would start to pay NIC. From 6 April 2025, some employees may be required to take a salary at the employees NIC threshold (currently £6,396) for the year to qualify. This will result in employer NIC becoming payable as the employee threshold is now greater than the employer threshold. This would result in employers paying NIC in order for employees to receive full state pension entitlement.
Payment reminders
For those who had 31 January tax payments due, if these are currently unpaid, late payment interest will be accruing at HMRC’s official rate of interest. If the tax due is outstanding more than 30 days after the due date, a penalty of 5% of the unpaid tax will be charged. A further 5% penalty will be applied if the tax payment is 6 months late and a final penalty of 5% will be applied if it remains unpaid after a year of becoming due.
As we are approaching the 30 days following 31 January, please ensure your tax payments are up to date to avoid any unexpected interest and/or penalties being applied.