Straight Talking: Detangling Tax

After all, tax savings over a lifetime can be tremendous and might significantly impact clients, their families and even their employees. Here, we take you through the basic rules around Income Tax, Capital Gains Tax, and Inheritance Tax and touch on Buy-to-let tax implications.

Tax is, of course, an inherent part of our lives, and to avoid it is illegal. However, there are ways to use tax allowances and opportunities which an Attivo Lifestyle Financial Planner can help with. Part of financial planning is about being efficient and ensuring that allowances and exemptions are used and that planning is put in place to mitigate tax where it is suitable.

As part of the Attivo offering, we have a team of paraplanners who are experts in researching and analysing the best financial products in the market. It’s just one reason why Attivo’s independent status works so well for our clients.

Income Tax

This is the tax that most people will be aware of, given that we are all likely to have paid income tax at some point in our lives. The personal tax allowance (the amount earned before tax is paid) has been frozen at £12,570 since 2021 and will remain at the current rate until 2027/28. This has pushed more people into the additional rate of income tax (45% paid on all earnings over £125 140*).

With the personal allowance frozen and the band into the higher rate frozen, we have already seen the number of people paying tax – and paying tax at the higher rate (40%) – increasing by millions as income and salaries grow. This is projected to reach around 20% of people paying a higher rate by 2027 (compared to just 3.5% in 1991/92).

Furthermore, recent changes decreased the additional income tax rate to £125,140 from £150,000. Other considerations for high earners are that people earning over £100,000 lose their personal allowance at a rate of £1 for every £2 earned over £100,000. Hence, additional rate taxpayers have no personal tax allowance.

What can be done to reduce the amount of Income Tax paid?

Strategies such as pension contributions can help reduce gross salaries or reclaim tax paid at your marginal rate, whilst alternative investment products such as Venture Capital Trusts and Enterprise Investment Schemes also provide generous income tax incentives upon investment, and many provide tax incentives across multiple types of taxation.

*Some income tax rates differ in Scotland, where a new 45% band took effect in April 2024.

Capital Gains Tax (CGT)

Capital Gains Tax (CGT) is a tax on profits when you dispose of an asset that has increased in value, and it is the gain that is taxed and not the value of the investment—for example, a second home or buy-to-let property, or assets transferred during a divorce. If you would like details on all forms of CGT, speak to an Attivo planner, as the rules can be complex. The amount of CGT you pay will depend on your income, so, for example, if you are a basic rate taxpayer, you will be charged a rate of 18%; anything over the basic rate is charged at 24% (compared to the previous rates of 10 % and 20% respectively).

Along with certain capital gains exemptions, there are planning opportunities and exemptions/reliefs that an Attivo Lifestyle Financial Planner will be happy to discuss with you.

Inheritance Tax (IHT)

Significant changes in Inheritance tax (IHT) were announced in the Autumn 2024 budget. Inheritance Tax is the money paid to the government from the estate of a deceased person and includes all property, possessions, and money. It is potentially one of the higher rates of tax some people, or their estates/executors, will incur and is taxed at a rate of 40% but only on the estate’s value above tax-free thresholds outlined below.

Mitigating the Inheritance Tax (IHT) burden: five key strategies

There are several effective strategies for reducing the Inheritance Tax (IHT) burden on your estate. These options allow you to manage your tax liability while also considering your ongoing need for income and access to capital. The main strategies include: