Does your income fall into the ‘higher’ or ‘additional’ rate tax band? If so, you may be looking for tax-efficient investment options to make sure your money is working hard for you. Three tax-efficient means of investing are pensions – both private and workplace, ISAs and Junior ISAs. In this article we’ll discuss what is classified as a high earner, as well as give more information about each of the options mentioned above.
What classifies you as a higher rate earner in the UK?
In the UK there are three tax rate bands:
- Those who earn between £12,571 and £50,270 will pay the basic rate of 20% tax.
- Higher rate earners pay 40% tax on earnings between £50,271 and £125,140.
- Those earning above this threshold will pay the additional rate of 45% tax.
There is a tax-free personal allowance of £12,570 per financial year. However personal allowances for those earning over £100,000 will reduce by £1 for every £2 earned over the £100,000 threshold.
Pensions
If your income is generated from a place of employment, you will likely be enrolled in a workplace pension. Private pensions are also tax-efficient investments.
When investing in pensions, there are annual allowances that must be adhered to. The standard annual allowance is £60,000, or 100% of ‘relevant earnings’, whichever is lower, across all pensions contributed to within a tax year. Your relevant earnings are your total income from work such as salary, wages, bonuses, and overtime. They do not include rental income, income from savings or investments, or state benefits. Those earning over £200,000 may be subject to a tapered pension allowance.
Tapered pension allowance
If both the factors below are true, you will have a tapered pension allowance:
- your threshold income (your total income less your pension contributions) is over £200,000
- you adjusted income (your total income plus your employers’ contribution to your pension) is over £260,000
The tapered pension allowance reduces the standard annual allowance by £1 for every £2 that your adjusted income is over £260,000.
Example
If you earn a total of £260,000 including £30,000 pension contributions, your threshold income is £230,000.
If your employer also pays £30,000 into your pension, your adjusted income is £290,000. This is £30,000 over the adjusted income threshold of £260,000, meaning a reduction of £15,000 on the standard annual allowance.
This individual’s allowance is therefore £45,000.
As a total of £60,000 has been contributed to pensions by the individual and employer, they must pay income tax on the £15,000 difference.
Carry-forward
If you have any unused pension allowance from the previous three tax years, this may be able to be carried forward into the current tax year. This could mean a greater amount of tax-free pension contributions, and a greater amount of tax relief that can be claimed in the current tax year. To be eligible for carry forward, you must have been contributing to a pension scheme for the relevant tax year. Carry forward contributions are limited by the annual allowance of £60,000 or 100% of your ‘relevant earnings’.
Pension tax relief
You can claim up to 45% tax relief on your pension contributions, depending on your tax rate status. When you make a contribution, it will be automatically boosted by 20%, e.g. a contribution of £100 will get grossed up to £125. This may be via tax relief at source or from your net pay.
Relief at source – the pension provider will claim the tax relief from the government on your behalf
Net pay – your employer will take your pension contribution before your tax is calculated on your earnings
For private pensions, including those arranged by Willday Wealth Management, you will receive tax relief at source. For workplace pensions, it can be either form of tax relief, so you should consult your employer to determine how it is claimed.
Higher and additional rate taxpayers are able to claim the additional 20% or 25% via HMRC. The amount claimed through your tax return may be refunded in a few ways:
- As a lump sum at the end of the tax year
- Your tax code may be altered to lower the amount of tax you pay in the next tax year
- Your basic rate band may be extended so you only pay 20% tax on more of your income
- If you owe the HMRC taxes, the refund amount may be deducted from the amount owed
Benefits of investing in a pension with Willday Wealth Management
Willday Wealth Management can help you retire your way with a tax-efficient, globally diversified private pension (https://willdaywm.co.uk/pensions/) built and managed around your retirement. With a Willday pension you:
- Automatically get 20% tax relief at source plus you can claim* up to 25% additional relief depending on your tax bracket
- You can currently withdraw up to 25% of your pension tax-free either as one single sum or in instalments, from age 55 (pension access age).
- You can currently pass on your pension funds to your beneficiaries free of inheritance tax.
- Monitor the progress of your investments against your financial goals the simple way, by combining pensions and setting up regular contributions.
- You can track all account activity and performance 24/7 in-app or online with valuations updated daily.
- Set up regular contributions or make lump sum contributions into your investments easily on the app.
- Tell us when you aim to retire and we’ll manage your portfolio around your target date, reducing your risk as the date approaches
- Work towards your goals with a personal investment consultant – we’re here to help you get the most from your pension and overall investment plan
ISAs
A Stocks and Shares ISA differs from other investment products as any investment growth or income generated is free from both income tax and Capital Gains tax**. Each new tax year, UK residents can take advantage of a new £20,000 tax-free ISA limit. This means you can invest up to £20,000 across all your ISAs in a tax year. You can invest in a mix of ISA types including both cash ISAs and Stocks and Shares ISAs. This can be helpful if you wish to align each ISA with a different savings goal.
The tax-free status of the invested funds remain tax-free even after the tax year ends. Whilst the funds remain in the ISA, they are not subject to income tax or Capital Gains Tax.
Benefits of a Willday Wealth Management ISA
A benefit of a Stocks and Shares ISA over a pension contribution is that the money in an ISA is available and accessible immediately. Transferring your ISA from one provider to another doesn’t use any of your annual allowance as these funds were invested in a previous tax year e.g. you can transfer your cash ISA into a Stocks and Shares one and still invest the full £20,000.
Willday customers have access to our team of personal investment consultants. We’ll tailor-make your portfolio to your needs. Our expert team will make sure that your money is always working hard for you.
It’s simple and easy to transfer an existing ISA to Willday and have all your investments looked after neatly under one roof. We combine low fees with high-performing portfolios so you keep more money in your pocket.
Junior ISAs
Whether you find yourself in a position where you’ve reached your tax-free allowances for both pensions and ISAs, or you are simply planning for your children’s future, a Junior ISA is another tax-efficient investment.
The person setting up a Junior ISA for a child must be their parent or guardian. However anyone may contribute to the funds, whether that is for birthdays, Christmas, for passing on inheritance tax wealth or at any other time of year.
Up to £9,000 can be saved each year on your child’s behalf in a Junior ISA. This is the total amount that may be saved in the Junior ISA, no matter who the investment comes from. The £9,000 annual tax-free allowance for a Junior ISA falls outside the £20,000 ISA allowance.
Benefits of a Junior ISA
Growth from a Junior ISA is free from income tax and Capital Gains tax. It’s a great long-term and tax-efficient way to save. Your child cannot access the funds in their Junior ISA until they turn 18, so your invested funds have a great opportunity to grow**. They are able to manage where the money is invested from age 16, however no withdrawals can be made before age 18.
Junior ISAs are also a flexible investment. Saving does not need to be a consistent amount each month; it is able to change monthly, or ad hoc lump sums can be contributed. Plus, our leading ‘ImpulseSave’ technology allows you to save from as little as £1 to start your child’s journey. The potential for the growth of funds invested on your child’s behalf would provide a significant financial boost to your child as they enter adulthood.
How can Willday help you invest in a tax-efficient manner
Willday Wealth Management’s team of experts are on-hand to help you invest wisely to make your money work hard for you. We will discuss your current financial situation and your investment goals. We’ll then work with you to manage your portfolio around your key financial objectives. Call us now to start the conversation.
* You may be entitled to more or less than this amount, subject to your tax status.
** With investing, your capital is at risk and you may get less than what you invested. Tax treatment depends on your individual circumstances and may change in the future.
