Tax planning strategies for 2025

As we move further into 2025, the tax landscape in the UK is evolving, and staying ahead of these changes can make a significant difference to your financial wellbeing.

With tax allowances being lowered and new rules coming into play, careful tax planning is more crucial than ever. Whether you're managing investments, inheritance, or income, the right strategies now can help you reduce your liabilities and safeguard your wealth for the future.

In this blog, we will explore a few simple tax planning strategies for 2025. Let's dive into the key strategies that could make all the difference for your financial future.

Tax-Efficient Investments: ISAs Remain a Staple

For those looking to invest in a tax-efficient manner, Individual Savings Accounts (ISAs) remain a popular choice. You can invest up to £20,000 each year without paying tax on any of the returns, whether they are in the form of interest, dividends, or capital gains. This is a simple and effective way to shield your investments from tax.

Capital Gains Tax allowances are lower than ever

One of the most immediate concerns for taxpayers is the reduction in the Capital Gains Tax (CGT) exemption. As of the 2024-25 tax year, the exemption has been slashed to just £3,000. This means that more of your gains will be subject to CGT. If you've been planning to sell assets such as stocks, bonds, or property, now is the time to carefully evaluate your tax position.

With October’s Budget pushing the higher rates to 24 per cent, careful planning is a must. Planning ahead and making informed decisions about the timing of sales can be one of the most effective ways to manage your tax burden.

IHT Planning - Changes to Pensions: The Potential Inheritance Tax Issue

The rules around pensions will also change significantly by 2027. From this point, unused pensions will be included in your estate for IHT purposes. If you have a substantial pension pot, this could potentially increase the inheritance tax burden for your beneficiaries.

One strategy to offset this potential tax hit is to use life insurance policies written in trust. This can provide your beneficiaries with a tax-free sum, ensuring that they are not left with a significant IHT liability upon your passing. It’s essential to consider your long-term goals and structure your pensions in a way that ensures your wealth is passed on efficiently.

Inheritance Tax (IHT) is an area where careful planning is vital. With estates valued over £325,000 subject to a 40% tax rate, many individuals will face this burden unless they actively take steps to reduce the size of their taxable estate. Furthermore, the IHT Nil Rate Band (£325,000) and the Additional Nil Rate Band (£175,000) are frozen until April 2030.

One simple but effective strategy is to make use of the £3,000 annual gifting allowance, , which allows you to give up to £3,000 tax-free each year, either to one person or split between multiple recipients Additionally, you can take advantage of the small gift allowance, giving as many gifts of up to £250 per person as you wish, provided no other exemption applies to that recipient. For weddings or civil partnerships, tax-free gifts of up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to any other person can be made. Regular tax-free payments can also be given to help with someone’s living costs, as long as they come from your normal income and do not affect your standard of living.

To ensure compliance and proper tax planning, keep detailed records of any gifts, including the recipient, value, and date given. Consider starting early, as this allows you to benefit from compounding reductions in your estate value.

The 60% Income Tax Trap

For higher earners, the gradual withdrawal of the personal allowance between incomes of £100,000 and £125,140 can create an effective income tax rate of 60%. This trap means that for every £2 you earn over £100,000, your tax bill increases by £1, effectively reducing your net income by 60%.

A simple way to reduce this impact is through charitable donations. For example, by donating a portion of your income to charity, you can bring your income below the £100,000 threshold, thus preserving your personal allowance and reducing your overall tax burden. Charitable giving is not only beneficial for your finances, but it also allows you to contribute to causes close to your heart.

Pension contributions are another effective way of reducing taxable income to avoid the tax trap, or consider gifting income-generating assets to a spouse can help reduce your tax liabilities. If your income is close to or exceeds the £125,140 threshold, you can lower your taxable income by transferring assets that generate income (such as rental properties or investments) to a spouse with a lower income. This simple strategy can help keep you below the income tax threshold and preserve your personal allowance

Property Taxes: Rental Income and Capital Gains

For property owners, tax rates on rental income and capital gains are on the rise. If you’re a landlord with a large portfolio, it may be worth considering holding your properties in a limited company. This approach can offer better tax efficiency, as corporate tax rates are generally lower than personal income tax rates. However, there are additional administrative costs and complexities, so it's important to consult with a tax adviser to determine if this strategy is right for you.

If you're planning on selling property, it’s also worth considering the timing. With rising tax rates on both rental income and capital gains, selling before any further increases in taxation could save you a significant amount.

The End of Furnished Holiday Letting Relief

If you own a furnished holiday letting (FHL), be aware that special tax reliefs will no longer apply after 6 April 2025. Currently, properties that qualify as FHLs benefit from several tax advantages not available to other rental properties. If you’ve been considering selling your FHL, it’s advisable to do so before this deadline to take advantage of these reliefs.

Alternatively, if you want to sell but cannot do so before the deadline, you must stop renting the property as an FHL by this date.

Making Tax Digital (MTD) for Income Tax: Stay Ahead of the Curve

By 2026, individuals with an income above £50,000 will need to comply with Making Tax Digital (MTD) for Income Tax. This threshold will lower to £30,000 by 2027.

MTD will require individuals to keep digital records and submit quarterly updates to HMRC. Though this is still a few years away, it’s important to start considering how MTD will affect your record-keeping and reporting.

Conclusion

Tax planning strategies for 2025 are more important than ever. As we approach significant changes in the tax system, the right strategies can help you protect your wealth, reduce your tax liabilities, and ensure that your beneficiaries are not burdened with hefty taxes in the future.

Whether you're managing your investments, inheritance, or income, taking action now will provide you with the peace of mind that you're doing everything you can to secure your financial future.