Navigating changes to UK tax in 2024

Changes to UK tax rules and allowances will come thick and fast in the next few months.

Spurred by the need to encourage growth and saving as well as shore up the party’s chances in an upcoming general election, the Conservatives have announced cuts to national insurance rates and the abolition of the lifetime pension allowance. They have slashed tax-free allowances on capital gains and dividends and there may be more to come in chancellor Jeremy Hunt’s Budget on March 6.

Some of the changes have been criticised as insufficient to ease the burden of the cost of living crisis and that they will make it more difficult to understand savers’ tax burden. However, taxpayers may be able to capitalise on opportunities they present or insulate themselves from their adverse impacts.

How far do cuts to national insurance go?

From January 6, employed basic-rate taxpayers will pay 10 per cent, instead of 12 per cent national insurance.

Self-employed workers in the same tax band will pay 8 per cent from April, down from 9 per cent, and will no longer have to pay Class 2 national insurance, fixed at £3.45 a week for 2024-25.

Hunt said the changes would benefit 27mn people across the UK. It will save the average UK worker £447.86 over the year, according to wealth management firm Quilter.

Finance experts have questioned the overall benefit of the move, however. National insurance thresholds will be frozen until April 2028, which means many workers could start paying NI due to inflation or pay rises.

“On the face of it, this seems a relatively generous cut that will help put more money back in people’s pockets . . . but due to frozen tax bands and fiscal drag the real benefit is significantly smaller,” said Quilter.

Prime Minister Rishi Sunak has pledged to bring spending under control so he can implement further tax cuts next year. The UK’s tax burden is the highest on record, measured by the ratio of total taxes to GDP.

What does the abolition of the lifetime pension allowance mean?

The lifetime pension allowance will be scrapped from April 6, meaning pension holders will no longer have to pay 55 per cent tax on withdrawals from pots over £1.073mn, or 25 per cent plus income tax if removed as income.

The annual tax-free pensions contributions cap will rise for the first time in nine years from £40,000 to £60,000, while the money purchase allowance, the annual amount of tax-free contributions to defined contribution pensions, has also increased from £4,000 to £10,000.

The tax-free lump sum which can be withdrawn from a pension pot from the age of 55 will remain at 25 per cent, to a maximum of £268,275. However, if a pension pot was protected and capped before 2011 this does not apply.

Critics of the previous system said that it prevented high earners from staying in work and contributing more to their pension pots, with some opting for investments into offshore bonds.

Individuals who stand to benefit from the change are those with an above-average income and a substantial pension, such as NHS doctors. The move is partly intended to encourage them to stay in work instead of retiring early to avoid a higher tax bill.

However, adding to the complexity for savers is Labour’s indication that if elected, it will reverse the policy and introduce carve outs for NHS workers.

“This would be both complicated and controversial, effectively creating a special exemption for one group of public sector workers who already enjoy relatively generous pension entitlement,” said AJ Bell’s Rachel Vahey, head of policy development. “It remains to be seen whether a future government would really choose to go down this path.”

How will tax allowances change?

From April, the capital gains allowance will be halved to £3,000 a year. According to Lizzie Murray, a partner at accountancy Saffery, this will particularly affect wealthy individuals with managed stocks and shares portfolios.

“It’s people who have the ability to do a bit of planning every year and have assets they want to gift away and therefore make use of the annual exemption each year,” she said.

On the other hand, entrepreneurs who carry out a large transaction — say, when selling a business — are unlikely to see a big difference to their overall capital gains.

According to AJ Bell’s Laura Suter, investors and savers could respond by banking gains up to their allowance and do a Bed and Isa — when investments held outside an Isa are sold and then rebought within an Isa — to shelter investments from tax. Another option is transferring assets to a spouse to make use of any unused allowance,

However, some advisers say the changes do not need to influence clients’ investment decisions. Capital gains tax allowances have already been halved, after the £12,300 limit was reduced to £6,000 from April 2023.

“A 20 per cent high-rate [CGT] taxpayer is looking at around £600 difference,” said Nick Rolf, director of private clients at Investment Quorum, a wealth management firm. “I would always advise clients to let investment decisions dictate whether to buy and sell shares.”

The dividend tax allowance is also being halved to £500 a year. Shareholders may be able to opt to accelerate their dividends before the changes are made if they haven’t already used up their tax year allowance, but according to a freedom of information request by AJ Bell, 1.1mn more people will have to pay tax on dividends thanks to the allowance increasing in April.

Both changes will drag more people into the “hassle” of having to calculate and report their dividend income via a self-assessment return, especially if they hold high yielding dividend stocks.