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How to protect your wealth: saving money with effective tax planning for higher earners

You’ve worked hard, your income is going up, but now you’ve realised just how much the Government is taking off you in tax.

If you are earning over £100,000 a year before tax, then in some cases you could be paying as much as 60% of your income in tax and national insurance contributions.

What can you do?

Here is Tax Director Liam Coulter’s tax-planning guide for higher earners to help them streamline their tax burden and keep more of their hard-earned income.

Earn more, pay more: the taxation pitfalls you face on a bigger income

Compliance

If you’re earning over £150,000, it is mandatory to submit a self assessment tax return, even if your only income is from your employment and taxed under PAYE. You should be contacted by HMRC to inform you of this, and substantial penalties apply for failing to submit your returns (even if no extra tax is due).

Loss of personal allowance

In principle, everyone receives a personal allowance (currently £12,570); however, the more money you earn over £100k, the less you will benefit from it.

Once your income exceeds £100k, your Personal Allowance will gradually reduce at a rate of £1 for every £2 that you  earn above the £100k threshold – once your income goes above £125,140, your allowance disappears completely. This equates to an effective tax rate of 60%.

For example, let’s imagine that you earn a £100,000 salary and are awarded a £1,000 bonus. Not only would you pay £400 in tax on the £1,000 bonus, but you would also lose £500 of your personal allowance. This extra £500 would also be taxed at 40%, costing you another £200. As a result, earning an extra £1,000 would cost you £600 in tax, which equates to a 60% effective tax rate.

Loss of child benefit

Since 6 April 2024, child benefit has been effectively withdrawn at a rate of 1% for each £200 earned over £60,000 a year by the higher-income partner. Therefore, the benefit is fully withdrawn where income of the higher-income partner reaches £80,000 a year.

Reduction in pension allowance

An annual allowance limits the amount you can pay into pension schemes each year before you must pay income tax. The limit is £60,000 in 2024/25.

The annual allowance is tapered (reduced) for higher earners. It is reduced by £1 for every £2 someone earns over £260,000 (including pension contributions). Tapering stops when the annual allowance reaches £10,000.

Tax planning opportunities: how to pay less tax

Salary sacrifice

Instead of taking your pay rise, discuss with your employer if you can take non-cash employee benefits such as a company car, private health insurance, etc. through the salary sacrifice scheme.  Alternatively, see if you can reduce your salary by taking non-cash benefits. 

Pension contributions

Additional pension contributions reduce your taxable income, so they can help you to avoid the phasing-out of the personal allowance mentioned above. 

High earners often have unused allowances that can be leveraged. For pensions, ensure you make the most of your annual allowance, which allows you to contribute up to £60,000 tax-free for 2024-25.

If you did not use your full allowance from previous years, you can carry it forward for up to three years. This can significantly boost your retirement savings while providing tax relief.

Pension contributions on behalf of someone else

You could consider paying into a loved one’s pension, especially if you’ve used up your own allowances. This could be a husband, wife, civil partner or child. 

If you pay into someone else’s pension, tax relief is based on the tax rate of the person whose pension it is. Even if they’re not earning, as long as they are under 75, you can pay in up to £2,880 each tax year and they’ll receive 20% in tax relief from the government. This adds up to a total contribution of £3,600, which is the most that can be paid into a non-earner’s pension.

Saving into a pension on behalf of someone else doesn’t affect how much you can save into your own pension. 

Charitable donations

Charitable donations made under Gift Aid have tax advantages for the organisation receiving the donation, which can claim a 20% uplift in your donation. Higher and additional-rate taxpayers can claim an additional tax relief from their Income Tax.  Such donations are deducted from your income when calculating your Adjusted Net Income. This means you could be saving further tax, at up to 60%.

Tax-efficient investments

Individual Savings Accounts (ISAs) or Lifetime ISAs allow you to save a limited amount of money each year without paying tax on interest or dividends, which could bring down your overall taxable income if you can switch to these types of investments.

Get proper tax advice: contact the Wilson Nesbitt team today

It is essential you take proper financial and tax advice before considering any changes to salary sacrifice arrangements, pensions or investment products.

At Wilson Nesbitt, we have the necessary expertise to help you streamline your tax burden. Our tax professionals and specialist solicitors have years of experience advising private clients on tax planning and compliance.

If you need our help, enquire today so we can protect your interests. Give us a call on 0800 840 9293.

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