Article 8 changes to know for the new tax year

On 6 April, we made the big leap into the 2024/25 tax year. With it, a range of policy changes and legislative updates came into effect across the worlds of pensions, investments and tax.

To help you understand how you could be affected, here is some more information on eight of the key changes to look out for:

1. An increase to the National Living Wage
2. A bumper State Pension increase
3. Another cut to National Insurance
4. Abolition and replacement of the Lifetime Allowance
5. Changes to how you can invest in Individual Savings Accounts (ISAs)
6. A reduction in the annual exempt amount for Capital Gains Tax
7. A cut to the dividend allowance
8. More families to get more Child Benefit

1. The National Living Wage has gone up and it's good for your pension too

Not quite a change for the new tax year – it actually became law from 1 April – but the National Living Wage (NLW) has increased from £10.42 to £11.44 per hour and now applies to those aged 21 and over, down from the previous limit of 23.

The jump represents a 9.8% increase to the National Living Wage, which is great news in its own right, but sounds even better in the context of inflation currently sitting at 3.8%. As a result, those earning the NLW will find their new income is not only larger than before, but goes further when buying things too.

A possibly less obvious, but just as positive, benefit to the NLW increase is what the boost means for your workplace pension.

As long as you earn more than £10,000 per year, UK companies are legally required to auto-enrol all employees aged 22 and over into a workplace pension scheme, with a minimum contribution rate of 8% of your total salary (5% from you and 3% from your employer). If your salary goes up, as it has for those earning the NLW, so too do the contributions paid into your pension – a fact you’ll be grateful for when it comes to retirement.

Assuming their salary grows by 3% and their investments by 4.5% on an annual basis, our calculations actually predict that a 22-year-old full-time worker on the new National Living Wage could have an extra £32,700 in their workplace pension by age 68, compared to the same individual earning the old NLW.¹

2. A bumper State Pension increase

With every new tax year, the income received from the State Pension increases in line with the Treasury’s Triple Lock calculation. The result is an annual boost equal to the highest of the following economic data points:

• The average rate of inflation as measured by the Consumer Price Index (CPI) for September of the previous year (6.7% for this year’s calculation).
  
• The average rate of earnings growth for May to July of the previous year (8.5%).
• A minimum rate of 2.5%.

For 2024/25, the State Pension has been matched to earnings growth for May to July 2023, meaning all State Pensioners will receive an 8.5% increase to their income – the second-largest boost handed out since the Triple Lock first was implemented in 2011.

If you’re a State Pensioner receiving the full Basic State Pension, also known as the Old State Pension, you’ll see your annual income jump by £691.60, from £8,122.40 to £8,814.00 for the year. On the other hand, if you’re receiving the full New State Pension, you’ll take home an extra £902.20, going from £10,600.20 to £11,502.40 for 2024/25. If you’re unsure which type of State Pension applies to you, check out the Government’s guide.

As with the National Living Wage, the State Pension increase is over double the current rate of inflation, which will be welcome news for those who claim it.

3. Another cut to National Insurance

National Insurance (NI) is a tax that around 27 million workers across the UK pay on their earned income and around 2 million self-employed individuals pay on their profits, with the funds raised used by the Government to finance payment of the current State Pension. The tax is paid in the form of NI contributions, at least 10 years of which are required to be made before an individual can qualify for the minimum State Pension themselves in the future.

As part of his Autumn Statement for 2023, the Chancellor of the Exchequer announced plans to cut the main NI contributions rate for employees from 12% to 10%, as well as to cut the main Class 4 NI rate for the self-employed from 9% to 8%. The former came into effect from 6 January 2024, with the latter targeting the beginning of the 2024/25 tax year.

However, in a big surprise to many, the Chancellor used his Spring Budget in March 2024 to announce that he wasn’t done cutting National Insurance just yet.

For the 2024/25 tax year, the main NI contribution rate for employees now sits at 8%, having been reduced by a further 2 percentage points from its previous January cut. While the main Class 4 NI contribution rate for self-employed workers now stands at 6%, marking an extension of the original plans to lower it to 8%. Either way, it represents a greater proportion of your salary or profit making it into your pocket.

4. Abolition and replacement of the Lifetime Allowance

Much to the delight of those with high-value pension savings, the Lifetime Allowance (LTA) that capped the amount you can withdraw from pensions in your lifetime without additional tax charges at £1,073,100 (or higher where LTA protection exists), has now been abolished for the new tax year.

However, tempering excitement somewhat, it’s also been replaced by two new allowances that you may need to be aware of: the Lump Sum Allowance (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA).

The Lump Sum Allowance limits the value of certain tax-free lump sums payable from your pension in your lifetime to £268,275. Although, some people with previous LTA protections will benefit from a higher allowance – you can find out more on LTA protections in this government guide.

At the same time, the Lump Sum and Death Benefit Allowance limits the total value of all tax-free lump sums paid to you in your lifetime and to your beneficiaries on death before age 75 to £1,073,100. Again, those with some previous LTA protections will benefit from a higher allowance. As a result, each time you receive a tax-free lump sum that’s measured against the Lump Sum Allowance, you’ll also be reducing your remaining Lump Sum and Death Benefit Allowance.

5. Changes to how you can invest in Individual Savings Accounts (ISAs)

Individual Savings Accounts, commonly known as ISAs, are among the most widely available and varied savings products in the UK. There are currently four unique types: the Lifetime ISA, Stocks and Shares ISA, Cash ISA and Innovative Finance ISA – each defined by their own unique features and limitations. For more information on just how varied the different ISAs are, you can read our dedicated ‘ISAs explained’ article.

Despite their many particular distinctions, one consistent rule across all ISAs has been that you can only invest into one of each product type in the same tax year. However, that has now all changed.

From the start of the 2024/25 tax year, you can now invest into multiple of the same ISA type in the same tax year, except for Lifetime ISAs. For example – if you wanted, you could invest into a Stocks and Share ISA from one provider and also invest into another Stocks and Shares ISA with another provider.

The change is good news for investors of all types, giving you greater flexibility in how you save and invest in ISAs. Be careful, though, as you’re still only able to invest a maximum of £20,000 across your ISAs in one tax year. If you’re unsure of how to manage your ISAs or looking for support in determining the right ISA for you, do consider speaking to a financial adviser.

6. A reduction in the annual exempt amount for Capital Gains Tax

Capital Gains Tax (CGT) is paid on profits you make above the Capital Gains Tax annual exemption rate, when you ‘dispose of’ (sell, transfer, gift, swap, get compensation for) an asset.

In April 2023, the annual exemption for Capital Gains Tax was reduced from £12,300 to £6,000. Now, for 2024/25, it has received a second consecutive cut, this time taking the annual exempt amount down to £3,000.

As a result of this cut to the annual exemption, anyone hoping to sell qualifying assets this year may  have to pay Capital Gain Tax on a greater proportion of the profit received. For more information on which assets qualify for CGT, check out the Government’s guide.

7. A cut to dividend allowance

If you own shares in a company that has made a profit, you’re likely to receive a proportion of that profit in the form of a dividend payment. You can also receive dividends if you own shares through a mutual fund or an exchange traded fund.

Much like the Capital Gains Tax annual exemption, you get a dividend allowance each year, meaning you only pay tax on your dividend income above the set threshold. And, even more like the Capital Gains Tax annual exemption, the dividend allowance has been subject to a second consecutive cut.

For 2024/25, the dividend allowance now stands at £500, a 50% cut from the previous limit of £1,000. Consequently, if you earn dividends as a shareholder of a corporation or as an investor, you’re likely to pay more tax on them from this year. For more information on dividend tax, take a look at the Government’s guide.

8. More families to get more Child Benefit

One of the most surprising pieces to come from the 2024 Spring Budget, was the announcement of substantial changes that impact Child Benefit – an allowance paid to you or your partner (per child) if you’re responsible for bringing up a child who is either under 16 or under 20 and still in approved education or training.

More specifically, the 2024/25 changes relate to the High-Income Child Benefit Charge, which is a tax applied to the higher-earning parent, where their individual income is above a pre-determined threshold.

Previously, you were able to claim the full Child Benefit if you and your partner’s respective incomes fell below £50,000, but this has now been increased to £60,000. This is great news for hardworking families up and down the country, as more parents will be able to claim the full amount without having to pay the High-Income Child Benefit Charge.

Not only has the income threshold been increased, but so too has the tapering of the Charge for those earning above the new £60,000 limit. Before these changes came into effect, it used to be that the higher-earning parent with an income of between £50,000 and £60,000 would have to pay a tax charge of 1% of their Child Benefit for every £100 of income over £50,000, until it fully negated the Child Benefit at the upper limit.

Now, the higher-earning parent with an income between £60,000 and £80,000 will be subject to a tax charge of 1% of their Child Benefit for every £200 of income over £60,000, until it fully negates the Child Benefit at the upper limit. This means a greater proportion of people will receive more Child Benefit.

You can work out your Child Benefit entitlement by using the Government’s Child Benefit Tax Calculator.

Understanding your options

With so many changes to keep track of this new tax year, it’s understandable if you have further questions as to how you could be affected or how you should respond.

Should you have any questions about managing your money, you should consider getting financial advice. MoneyHelper, a free service from the UK Government, has a number of helpful articles on financial advice, as well as a directory for finding the right adviser for you.

You can also visit our Money tips page for a variety of insightful articles on a range of financial topics – including the State Pension, financial planning and saving ideas.