Tax burdens can weigh heavy on higher and additional rate taxpayers. So, it’s important to ensure you are maximising your tax efficiency wherever possible. In this article, we’ll discuss what is classified as a high earner, and some tax-efficient investment opportunities available to them.
What is a high earner?
A high earner, for the purposes of tax bands, is anyone with taxable income over £50,271. Those earning between this amount and £125,140 will pay 40% tax on these earnings. If you earn over this upper threshold, the additional rate of 45% tax will be due. These thresholds have been frozen until 2031 in what is known as fiscal drag. This is a method used by governments to increase revenue from taxes without increasing tax rates. As many receive pay rises in line with the increased cost of living, increasing numbers find themselves in these higher tax bands.
Personal allowance
A factor affecting some high earners is the reduction in your personal allowance. Most people have a personal allowance of £12,570. This is the amount you can earn without paying tax. High earners will see their personal allowance reduce by £1 for every £2 over £100,000 that they earn. So, if you earn over £125,140, you will have zero personal allowance. By reducing your taxable income, you may retain some of your personal allowance, underlining the importance of tax efficiency.
A fine balance of reducing your taxable income whilst ensuring you do not reduce your overall wealth is essential. The good news is there are a number of tax efficient opportunities available to aid this, as we’ll go on to discuss.
Tax efficient opportunities
There are several tax efficient opportunities that will help you pay less tax whilst also boosting your retirement income. This includes pension contributions, ISAs and salary sacrifice.
Pension Contributions
Not only will contributing to your pension reduce your taxable income, and boost your retirement income, you will also benefit from tax relief.
Each year, most people can contribute £60,000 per year into their pension, including tax relief. This amount is tapered for those earning over £200,000 per year. Find out more about tapered allowances in our blog post from earlier in the year. You can calculate your tapered allowance on the government website.
If you did not use your full pension allowance in any of the previous three years, you can carry the unused allowance over. Your contributions, though, cannot be higher than your earnings, or £3,600, whichever is greater. Pension contributions will benefit from tax relief of at least 20%. Higher- and additional-rate taxpayers can claim back up to 25% more. The 20% tax relief available to all is automatically paid into your pension. Higher rate taxpayers can claim a further 20% tax relief via self-assessment, with additional-rate taxpayers able to claim an extra 25%. This tax relief is paid to the individual directly, not into your pension.
All growth* within workplace and private pensions is free from income and Capital Gains Tax. Contributions also reduce your taxable income so this makes pensions a great way to save for your retirement.
ISAs
Investing in an ISA is a further tax efficient opportunity. Each financial year you can save up to £20,000 into one or a combination of Cash and Stocks and Shares ISAs. From April 2027, the Cash ISA allowance is reducing to a maximum of £12,000 for under 65s. The remaining £8,000 will be ringfenced solely for investment in Stocks and Shares ISAs. You can put the full £20,000 into Stocks and Shares ISAs but if you wish to use a cash ISA as well then you can only put in a maximum of £12,000 from April 2027.
As with pension contributions, any investment growth* is free from income and Capital Gains Tax. Investment in ISAs should be viewed as long-term investments to give your money as long as possible to grow. That said, funds may be withdrawn from an ISA at any time, tax-free.
If you have children under the age of 18, you can open a Junior ISA on their behalf. A total of £9,000 may be paid in to a Junior ISA each tax year. Money can be contributed by anyone, tax-free, once the account has been opened by a parent/guardian. The invested funds are not accessible until the child turns 18, though they will take control of the investments at age 16.
Salary sacrifice schemes
Some employers offer salary sacrifice schemes to employees. The employee gives up part of their salary, before tax is calculated, in return for a benefit. This may be contributions to a workplace pension, or childcare vouchers, for example. By removing this amount from your salary before tax is calculated, your taxable earnings will be lower, leading to a diminished tax burden.
How Willday Wealth Management can help you
The Willday Wealth Management team will help you understand tax efficiency options and make investments to benefit your individual circumstances. We’ll guide you in building a pension portfolio that is both tax-efficient and globally diversified. Our expert team will also make sure your Stocks and Shares ISA investments are working hard for you. We’ll tailor-make your portfolio to your needs to meet your investment goals.
Call us on 0116 222 0119 or email hi@willdaywm.co.uk to find out more about maximising tax relief benefits and allowances whilst still growing your wealth.
*With investing your capital is at risk and you may get less than what you invested
