Questions and Answers
What can high earners do to save tax?
I am a high earner and am looking at a large tax liability to pay in January. How can I make changes to reduce my tax liability and save tax?
By Catherine Heinen, FCCAFirstly, what is a high earner? In England, Wales and Northern Ireland an individual may be a higher rate taxpayer where they earn more than £50,271. In Scotland, the higher rate of tax starts at £43,663.
The additional rate in England, Wales and Northern Ireland or Top rate in Scotland comes in at earnings over £125,140. (Please note that Scotland also has an Advanced rate of tax on earnings £75,001 to £125,140).
Furthermore, the personal allowance starts to be tapered off on earnings exceeding £100,000, meaning you lose £1 for every £2 of income above £100,000. At £110,000 your personal allowance will be £7,570, and at £125,140 your personal allowance will be £0.
What are earnings?
Earnings can include salary, self-employed income, property income and investment income.
What can you do to reduce your tax?
1. Contribute to your pension
A pension is an important method of planning for your future and will provide you with income after you retire. Pension contributions are a tax-efficient way to save and prepare for retirement.
- Personal pension contributions attract automatic tax relief whereby your pension provider claims basis rate tax relief (20%) and adds it to your pension pot.
- In a workplace pension, contributions can be made via salary sacrifice meaning your employer can take pension contributions from your pay before you pay tax.
If you pay tax at a higher rate you can claim additional tax relief through your self-assessment tax return or speak to HMRC.
2. Make charity donations (gift aid)
When you make donations to charity, these are tax-free. Through gift aid, the tax goes to the charity so it receives an additional amount on top of your donation.
If you’re a higher rate taxpayer, you can claim the difference between the tax you’ve paid and the amount the charity receives on your self-assessment tax return.
For employees, your tax code will reflect gift aid donations and charity contributions so it’s important to check your tax code.
3. Make use of your allowances
ISA allowance
Interest earned in an ISA is tax-free. As a higher rate individual, your savings allowance may be £500 a year so you could find that your interest income exceeds your allowance and becomes taxable income.
Dividend allowance
Dividends received are taxed at dividend rates. For higher rate taxpayers this is 33.75% and for additional rate taxpayers this is 39.35%. Individuals are entitled to a dividend allowance of £500 for 2024/25, meaning you can receive £500 dividend income tax-free.
What else could you consider?
- High Income child benefit charge – if you’re earning over £60,000 you will be subject to the high income child benefit charge. By £80,000 you will be liable to pay tax to HMRC equal to your child benefit income. It may be necessary to mark on your record that you do not want to be paid child benefit to avoid having to pay it back.
- 60% tax trap – you’ll be subject to the 60% tax trap as a result of the loss of your personal allowance, managing your income can help you navigate this.
- Make use of your annual capital gains tax exemption – if you’re planning on selling an asset that could be liable to Capital Gains Tax, consider getting advice over timing. This can help you make use of your annual exempt amount, as well as planning around whether you’ll be paying the higher CGT rate for each year.
- Invest in start-ups – for individuals with surplus income, investing in other businesses through EIS/SEIS/VCT schemes could offer you tax savings and advantages.
- Make gifts – when it comes to Inheritance Tax, making gifts to family earlier could help to mitigate your inheritance tax liability.
How we can help
Speaking to an accountant about your personal circumstances and tax situation will provide you with proactive tax planning to ensure you consider the consequences of your financial decisions.
Speak to our friendly and experienced advisors by calling 01302 957020 or use our online contact form and we’ll get back to you.
Frequently Asked Questions
The deadline for completing a self-assessment tax return is 31st January, when completing this online. If you want to submit a paper tax return, the deadline is 31st October.
There are lots of benefits to getting ahead with your tax return, to find out more look at our content hub.
Tax Credits reduce the amount of tax that you pay. The tax credits you are entitled to are dependent upon your personal circumstances.
Another great way to save money on your tax bill is to pay into a pension. The government offers generous tax relief at your highest tax rate.
An allowable expense is an expense that is directly related to the running of your business. For example goods that you buy for resale, employees' payment, rent and bills for your business premises, interest payments for money you borrowed to finance your business.
If you make any money outside of your normal PAYE income from your job then you need to file a self-assessment tax return each year. The form you need to file is called a Form 11.
Some common reasons you may need to file a tax return include; you are self-employed, work freelance or as a contractor, you are a landlord or make money using Airbnb, you are the director of a company, you own shares, you have sold a personal asset or sold all or part of your business, you have inherited money, you make some extra cash doing nixers.
Date published 8 Oct 2024
This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.
Catherine Heinen, FCCA
Catherine is a Technical Content Writer at TaxAssist Accountants, and a qualified accountant. With experience working at two accountancy practices in the UK top 50 accountancy firms according to Accountancy Age, Catherine has significant experience in accounts, tax returns and advising clients. Catherine ensures businesses, business owners and individuals are kept up to date and informed by providing concise and informative technical material.
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