UK income tax rates 2024/25: maximise your allowance

When crafting an annual tax plan, for the vast majority of UK taxpayers, income tax considerations will play a pivotal role.

In the 2024/25 tax year, this has been and still is especially true. The government relies on income tax as a major source of revenue, and as global economic conditions change, so too do the challenges and opportunities in tax planning.

Income tax receipts as a proportion of GDP are at their highest level since the 1980s, and with an estimated 400,000 more taxpayers being forced into the 40% income tax band in 2024/25, this level is expected to rise further. The Office for Budget Responsibility (OBR) predicts that seven million people will pay higher-rate tax in 2025-26, representing 2.5 million more taxpayers than if income tax thresholds had never been frozen. 

The changes in tax brackets as well as fiscal drag mean that taxpayers need to be increasingly aware of how their earnings are spread across different tax thresholds to minimise liabilities.

As a result, understanding income tax rates and how to minimise your exposure to them in 2024/25 and beyond – for high earners especially – can prove particularly beneficial. It is also wise to consider all available tax planning tools, including options that safeguard both your taxable dividend income and other sources of earnings.

What are the UK income tax rates for 2024/25?

The UK income tax rates for 2024/25 have remained the same as 2023/24, at 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers (except Scotland).

Income Tax Bands in England, Wales and Northern Ireland
2024/25 and 2025/26*

*The figures quoted are a prediction for income tax bands for the 2025/26 tax year. The figures are generated based on the announced data from HMRC.

The personal allowance, basic rate threshold and higher rate threshold have remained the same from the 2022/23 tax year, but the additional rate threshold was reduced from £150,000 to £125,140 in the 2023/24 year. Based on current information, this change will continue into 2025/26. For high earners, careful attention must be paid to how much of their earnings fall within each of these thresholds, ensuring optimal use of their remaining personal allowance.

Whilst Scotland has mirrored this reduction of its top rate threshold to £125,140, the nation’s five-band income tax system noticed a greater extent of changes in 2023/24 to 2024/25 for high earners especially.

How are taxpayers being affected?

The reduced additional income tax threshold of £125,140, introduced for all UK nations in 2022/23, has had a particularly erosive impact on income for high earners. Previously set at £150,000, the £24,860 reduction of the threshold has forced a further 250,000 taxpayers into the additional 45% tax bracket. This change also affects how much of an individual’s earnings is subject to higher rates of tax on both employment income and dividend income.

For individuals with an annual income of £150,000 or above, this change has had a considerably erosive impact on long-term earnings. In 2024/25, a taxpayer in England, Wales, or Northern Ireland earning £150,000 will pay the 45% tax rate on £24,860 of their income.

Whilst lowering thresholds hasn't been a new issue for UK taxpayers in 2024/25 going into 2025/26, periods of higher inflation, income tax bands and allowances frozen until 2028 and high wage growth have been. A single year of 7% average wage growth (with low real wage growth) means an individual earning £150,000 in 2023/24 will see an additional £10,500 taxed at 45%, resulting in an extra £4,522.50 in tax. As wage growth and inflation continue, this will likely be an issue moving into the 2025/26 tax year as well.

It’s important to note that these adjustments can also affect any dividend income received, which may subsequently be taxed at higher rates.

**Incomes over £125,140 are not eligible for the personal allowance in the UK.

While this may seem like a relatively small increase, investing an extra £4,500 per year could have a significant impact on long-term personal finances. As wages continue to rise, more people will be affected by this higher tax rate in the coming years, not only through income tax on employment earnings but also on dividend income and other revenue streams.

Are there any allowances available to reduce my income tax liability in 2024/25?

In the UK, individuals can make use of several tax-free allowances each year. Spanning taxes from income tax to capital gains tax, utilising these together can help to minimise annual tax liabilities. Some of the most significant include:

• Personal allowance: In the UK, taxpayers are entitled to a personal allowance, which is the level of annual income they can earn before they start paying income tax. For the 2023/24 tax year, the personal allowance is £12,570. For every £2 earned over £100,000, taxpayers lose £1 from their personal allowance (which is then taxed at the 40% rate). This means that all taxpayers with an income over £125,140 do not receive the personal allowance. Looking into salary sacrifice schemes can be a great option when earning between £100,000 and £125,140, where individuals might be able to reduce their taxable income—and by extension, maintain greater tax efficiency on both their salary and dividend income.
  
  
• Capital gains tax allowance: Individuals can realise profits on the sale of assets such as shares and property up to a certain level each year free of capital gains tax. In 2023/24 this allowance is £6,000, having more than halved from 2022/23’s figure of £12,300. This allowance is set to halve further to £3,000 in April 2024.
  
  
• Dividend allowance: Individuals can earn up to £1,000 in dividends annually – free of dividend tax – as of the 2023/24 tax year. This allowance applies to dividend income from various sources and was halved from 2022/23’s figure of £2,000 and is set to be halved again to £500 in April 2024.
• ISA allowance: The level of capital an individual can contribute to an ISA each tax year without paying tax on interest, dividends, or capital gains is £20,000 in 2023/24. This can be split across four types of ISAs – Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs (IFISAs) and Lifetime ISAs – or allocated solely to one ISA.

Which reliefs & schemes can I use to minimise my income tax liability in 2024/25?

Alongside the tax-free allowances individuals can make use of, a number of reliefs and schemes can be accessed to further minimise income tax liabilities. With tax-free allowances being gradually reduced and cut by the UK government – for high earners especially – understanding how to make use of these tools is becoming increasingly essential.

1. Enterprise Investment Scheme (EIS)

The Enterprise Investment Scheme (EIS) is a tax-efficient venture capital scheme that offers individuals a generous range of tax incentives when investing in early-stage companies.

One of the most attractive tax incentives offered by the EIS is 30% income tax relief. This relief enables an investor to claim back up to 30% of the sum they invest into the EIS from their income tax bill of the current or previous tax year.

With the annual EIS investment maximum standing at £1 million in 2024/25 (or £2m should everything over £1m be invested into knowledge-intensive companies [KICs]), this can enable taxpayers to claim annual income tax relief of up to £600,000, ultimately reducing the overall tax liability on both employment earnings and other revenue streams.

2. Seed Enterprise Investment Scheme (SEIS)

The Seed Enterprise Investment Scheme (SEIS), is the 'younger sibling' of the EIS. Introduced in 2012, it facilitates investment specifically into especially early-stage startups, and in turn, offers investors even more generous tax reliefs to offset the added risk this can bring.

The headline SEIS tax incentive is 50% income tax relief on the amount invested (up to £200,000 annually, following changes that came into effect in April 2023).

Alongside this income tax relief, the EIS and SEIS offer investors capital gains tax exemption, capital gains tax deferral/reinvestment relief, inheritance tax exemption and loss relief. For individuals with considerable tax bills, this can make the schemes especially attractive in 2024/25.

3. Venture Capital Trusts (VCTs)

VCTs are investment trusts that pool investor capital to invest in a collection of small to medium-sized companies on the investors' behalf and with the advantage of several added tax reliefs. VCTs offer 30% income tax relief up to a maximum investment of £200,000 per year, though their tax advantages are not as extensive as those of the EIS and SEIS. While VCTs might help reduce your overall tax liability, investors should also consider the impact on national insurance contributions when evaluating their total tax position.

4. Individual Savings Accounts (ISAs)

Individual Savings Accounts (ISAs) allow investors to save and/or invest money without paying tax on any interest or capital gains earned. The annual ISA allowance for the 2024/25 tax year is £20,000. Investors can allocate this allowance across the full ISA family, including the Cash ISA, Stocks and Shares ISA, Innovative Finance ISA and Lifetime ISAs.

5. Pension Contributions

In the UK, income tax relief is available on contributions to pension schemes. Basic-rate taxpayers can receive 20% tax relief, while higher-rate and additional-rate taxpayers can receive 40% and 45% respectively. Investors can contribute up to 100% of their earnings to a pension scheme, subject to an annual allowance of £60,000 for the tax year 2024/25. In addition to regular pension contributions, it’s worth exploring options such as transferring unused allowances from a partner through the marriage allowance, which can further enhance your overall tax position. Individuals looking to invest using their pension can make use of an additional range of tax advantages via both personal schemes and occupational schemes set up by employers. Popular examples of these include Self Invested Personal Pensions (SIPPs) and Small Self Administered Schemes (SSAS).

6. Salary sacrifice schemes

Salary sacrifice schemes (SSS) are arrangements where an employee agrees to reduce their salary in exchange for non-cash benefits. This helps lower taxable income, thereby reducing income and National Insurance contributions whilst making individuals less sesetable to income tax rate changes. Unlike investment schemes like the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS), which provide tax relief on investments, salary sacrifice schemes directly reduce taxable income. They also indirectly control how much of your earnings spill over into higher tax thresholds and tax brackets.

Options within Salary Sacrifice Schemes:

• Pension Contributions: Sacrificing part of your salary to contribute to a pension scheme offers tax efficiencies and boosts retirement savings.
• Childcare Vouchers: Available to existing members, this option helps cover childcare costs (closed to new applicants).
• Cycle to Work Scheme: Employees can lease a bike and safety equipment, promoting healthier commuting while reducing taxable income.
• Car Leasing: Some employers offer schemes for leasing cars, including electric vehicles, such as the Octopus Energy SSS, which reduces taxable income.
• Technology Schemes: Sacrifice salary in exchange for tech products like laptops and smartphones, often at a reduced cost.
• Holiday Schemes: Some employers allow employees to sacrifice salary for planned holidays.

As these schemes reduce both income tax and National Insurance contributions, they are increasingly popular.

However, it’s important to note that relying solely on SSS for tax planning can be risky. With rising popularity, government intervention is probable, and to secure revenue, the government may adjust or limit salary sacrifice policies if they see significant reductions in taxable income.

Forming an income tax plan in 2024/25 and beyond

When crafting an income tax plan, it’s important to consider various strategies to optimise your tax position. Combining different tax relief options, such as the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS), with other methods can create a more comprehensive approach to managing tax liabilities. For example, salary sacrifice can reduce taxable income and EIS can provide valuable income tax relief on investments, ensuring a robust strategy for tax reduction while managing both earnings and dividend income.

The most appropriate tax strategy for any individual will depend on their unique circumstances. As income tax rules become stricter and tax-free allowances remain frozen, taxpayers will need to explore more effective ways to reduce their liabilities—whether through utilising relatively straightforward tools like the marriage allowance or employing complex portfolios of tax-efficient investment options. For some, utilising the UK’s tax-free allowances may be sufficient.

However, those with higher income tax bills may need to consider additional tools to minimise their exposure, ensuring that all thresholds and brackets are optimally managed.

Tax-efficient investment options, such as EIS and SEIS, offer generous income tax relief, while pension schemes like SIPPs and SSASs provide additional tax advantages on pension contributions. The right strategy will vary depending on each taxpayer’s goals and financial situation. In this dynamic and increasingly high tax environment, it will be crucial to manage revenue, earnings, and dividend income effectively while also considering national insurance and tax brackets.

As tax rules continue to evolve, staying informed about the latest changes and the full range of available tax-efficient tools will be crucial. Effective income tax planning for 2024/25 and beyond requires a proactive, well-informed approach to ensure the right strategies are employed to minimise liabilities and maximise available benefits.

GCV Invest is an FCA authorised co-investment platform and private investor network. We do not offer financial or tax advice. Individuals should seek professional advice from a qualified adviser prior to investing.