Sound tax planning is important for any individual and family. But for – and additional-rate taxpayers looking to protect their wealth, it becomes crucial to maximise opportunities and avoid common tax pitfalls. Thankfully there are many legitimate tax planning strategies available for high-income earners in the UK.
Taking advantage of such opportunities may allow you to minimise your tax liabilities, pass on greater wealth tax-efficiently or even bring retirement closer. Whatever your goals, our financial planning advice on tax savings for high earners
Read on to understand some of the key considerations relating to high-net-worth tax planning. If you believe that you could benefit from expert advice in these areas, do not hesitate to request a free consultation. Whether you are short on time or simply seeking expert guidance, we can help to forge a tax planning strategy aligned to both your wealth and your objectives.
Why is high-net-worth tax planning important?
Tax planning and tax optimisation, in short, involves assessing your tax liabilities and exploring what opportunities there are to manage them. While doing so is unlikely to be a primary financial goal, it is a great way to support your wider vision for the future; that might involve achieving financial independence, supporting loved ones, or other objectives.
and allowances regarding earnings, incomes, savings and investments. It is important to take advantage of them while they are available, however, as they reset at the end of each annual tax year; although some carry-forward opportunities may be available.
Creating a robust high-net-worth plan for tax optimisation can be a multi-faceted task, as we have outlined below. It may not be something to which you are able to give adequate attention. But our financial planning advisers have the expertise and resource to appraise your position.
What are some key tax planning strategies for high-income earners?
Individual Savings Accounts (ISAs)
Individual Savings Accounts (ISAs) are one of the more straightforward options when it comes to high-income tax planning. Adults can invest up to £20,000 during a tax year, with any growth, interest or income accrued free from income, capital gains and dividend tax.
If you have a family, your partner can shelter the same sum from taxation and, once you have used up your individual ISA allowance, it is possible to invest in a Junior ISA for children or grandchildren under the age of 18 living in the UK. The current annual allowance for Junior ISAs is £9,000 – though bear in mind that this money legally becomes theirs once they turn 18.
Pension contributions are another core element of sound tax planning for high-net-worth individuals.
Each tax year, most people can pay either 100% of their salary or up to £40,000 into their pension (whichever is lowest). These contributions qualify for income tax relief at your marginal rate of tax. Your annual allowance includes both yours and your employer’s contributions.
If you fail to use your full allowance in a given tax year, all is not necessarily lost. You may be able to carry it forward for up to three years. There are various stipulations, however, so it is worth seeking expert advice to be sure of your position. This is especially true for high earners where the tapered annual allowance may come into effect to reduce pension payments to as little as £4,000 for those earning over £240,000.
It is worth bearing in mind that while invested your pension fund grows without any liability to income tax or capital gains tax; however, you will pay income tax on your pension at retirement. Note, too, that you have a lifetime pension allowance of £1,073,100 – a figure now frozen until April.
Pensions are also usually exempt from inheritance tax (IHT) charges, allowing you to pass on wealth to dependents and family tax-efficiently. There are situations in which IHT can and does apply, however. Our pension financial advisers can help shape your pension plan effectively to manage your liability.
Similar to pension contributions, charitable donations made under Gift Aid also hold tax advantages for higher- and additional-rate taxpayers.
You will receive a 20% or 25% relief, respectively, on the gross value. Your organisation of choice, meanwhile, can reclaim the basic rate of tax, further benefitting their cause. Any donations will be deducted from your adjusted net income, too, potentially offering more tax savings.
It is also possible to make tax-efficient charitable donations through Payroll Giving with your employer.
Making use of tax-efficient investment schemes can prove an important piece of tax advice for high-income earners in the UK. If you are looking to invest into small UK companies, there are three tax-advantaged schemes offered by the UK government to promote business growth.
Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)
The EIS and SEIS are similar in nature, offering income tax relief – 30% and 50%, respectively – on investments in eligible companies. There is no Capital Gains Tax (CGT) on any investment held for over three years. If you suffer financial loss, loss relief is available.
Venture Capital Trusts (VCTs)
VCTs are a specialist product for investors who lock away money for at least five years. You can receive 30% income tax relief and tax-free dividends, with no CGT payable on gains made through sale.
Other tax-planning opportunities for high-net-worth individuals
The above is not an exhaustive list. Depending on your situation, there may be further opportunities to reduce your tax liabilities such as:
- Using salary-sacrifice schemes for purchases such as bikes, ultra-low-emission motor vehicles, extra annual leave and childcare vouchers
- Accessing tax relief on business expenses including working from home, travelling for work and professional memberships
- Taking advantage of various inheritance tax reliefs, such as annual tax-efficient gifts of £3,000 and small individual gifts of £250 per person
- Utilising the CGT annual exemption, currently £12,300 (and reducing to £6,000 and then £3,000 in the next 2 tax years) wisely, for example using the annual exemption of your partner or spouse if you exceed yours
- Maximising your dividend allowance if you hold stocks and shares outside of an ISA
The finer details of many such areas are complex and less widely known but, from estate tax planning for high-net-worth individuals to tax-efficient savings and investments, our specialists are equipped to clarify your position.
As well as seizing opportunities, we can help you to navigate common tax pitfalls such as those highlighted below.
What are some common tax pitfalls for high earners?
If you earn over £100,000 per year, you are legally mandated to submit a self-assessment tax return. This applies even if your income has already been taxed under PAYE.
You could face serious penalties for failing to submit your returns, even if you do not owe extra tax, making this an important part of tax planning for high-income earners.
Reducing personal allowance
Most taxpayers are entitled to a standard personal allowance of £12,570 tax-free income. But higher earners have their allowance reduced by £1 for every £2 earned over £100,000. This includes all income sources, such as interest and dividends as well as your salary and bonus. If you earn over £125,140, you will lose your allowance entirely.
Tapering of annual pension contribution allowance
We have discussed the standard tax benefits available on pension contributions. But this allowance also begins being tapered by £1 for every £2 taxable income beyond a specified limit, which is:
- Above £200,000 in ‘threshold income’, and
- Above £240,000 in ‘adjusted income’
Calculating these two figures can be complicated. So, too, can identifying options if you are likely to be impacted by a tapering pension allowance. But our experts can help to make full sense of your situation and recommend the most tax-efficient route forward.
When is high-net-worth tax management best done?
Tax planning for wealthy individuals, and indeed all individuals, is something that should be managed prior to and throughout the tax year.
is common and involves making sure that you have made the most of all available reliefs and allowances before they reset. But ideally this should be just one of several reviews completed over the year as part of a considered tax strategy.
Regular reviews also allow for the uncovering of new opportunities as and when your circumstances change. Common events which may impact your tax liabilities and the reliefs and allowances to which you are entitled include changes in employment and/or income.
Take advantage of specialist tax advice for high earners in the UK
Whether you lack a defined tax planning strategy or are seeking refinement, request a free consultation today. Our advisers have extensive experience supporting accountants, barristers, doctors, business owners, lawyers and many other high-income professionals. We can provide advice tailored to your goals, both short- and long-term, personal and benefitting others.
Why choose our high-net-worth tax planning specialists?
Our tax-management support for high-income individuals combines tangible financial benefits with personalised service. There are many reasons to feel confident in partnering with Saunderson House for your tax-planning needs:
- We are on hand to provide expert recommendations relevant to your financial situation and personal goals.
- You will benefit from a strong client-adviser relationship throughout the tax year.
- All our advisers adhere to the highest standards of ethical practice while holding extensive, up-to-date market knowledge.
- Do not just take our word for it; view our awards.
Reach out to our team to learn how our specialist tax advice for high earners can strengthen your position. We offer a free consultation to discuss your needs, with no obligation to use our services.