A Short Guide to Higher Rate Tax Savings

We can’t control inflation, the economy or the rates of tax. Therefore it’s important to focus on what we can control – maintaining a budget, spending sensibly, and taking advantage of opportunities to reduce tax.

Below, we look at some of the ways in which you can save tax as a higher rate taxpayer.

Pay Into Your Pension
Pensions are one of the most efficient ways of saving for retirement, especially for higher rate taxpayers.

When you make personal contributions to a pension, you receive tax relief of 20% credited directly to your pot. This means that every £100 contribution only costs you £80 from net income.

Additionally, higher and additional rate taxpayers can claim further relief through self-assessment. Providing this is done correctly, the cost of your pension contribution could reduce to £60 or even £55.

If you are employed and pay your contributions through salary sacrifice, you might even benefit from reduced National Insurance contributions.

Making contributions through your own business is a tax-efficient method of drawing profits – not only do you not pay personal tax, but your company can normally claim corporation tax relief.

Pensions grow free of tax and when you retire, you can take 25% as a tax-free lump sum. You can even pass your pension pot on to your loved ones when you die, in some cases, without any tax liability.

There are, of course, some limits on pension funding. Personal and employer contributions are capped at the annual allowance, currently £60,000 per year. However, this can be carried forward by up to three years if it is unused. Additionally, anyone earning over £260,000 is subject to the tapered annual allowance.

Contribute to an ISA
After pensions, ISAs are the next most tax-efficient option.

You can contribute up to £20,000 per year to an ISA. This can be invested in cash, stocks and shares, or a combination of both.

Your ISA is not subject to tax on income, capital gains, or when you take withdrawals. This can save significant amounts on investment-related taxes, particularly if you contribute every year and build up a reasonable sum.

Tax-Efficient Investing
If you hold cash or investments outside an ISA (or any other ‘tax wrapper’), income or gains could be subject to tax. However, there are a few allowances that can be used to offset this:

• If you receive interest on cash, you may be able to claim the savings allowance. This is £500 for higher rate taxpayers. Additional rate taxpayers do not receive this allowance.
• The dividend allowance (currently £1,000, reducing to £500 from April 2024) can be used to reduce the tax you pay on investment income. This can also be used against dividends from your own business.
• If you sell assets and make a profit, this will normally be subject to capital gains tax. You have an annual exemption of £6,000 (reducing to £3,000 from April 2024) which is free of tax. Additionally, you can claim any realised losses against future gains. This can be useful if you want to switch funds or take withdrawals. It’s a good idea to use your exemption every year to avoid large gains building up.

If you have a lump sum to invest, you may want to consider investment bonds as another tax-efficient investment option.

If your priority is saving tax and you are prepared to take some risks, you may want to consider Venture Capital Trusts (VCTs) or Enterprise Investment Schemes (EIS).  These allow you to invest in the shares of small unlisted companies and offer significant tax benefits. Of course, there is a risk that you could lose money.

Tax Planning for Couples
If one spouse is a higher earner and the other is a basic rate or non-taxpayer, there are a few opportunities to save on tax:

• If you hold more income-producing assets in the lower earning spouse’s name, the overall rate of tax paid will be lower.
• Additionally, the lower earning spouse may have some of their personal allowance or savings allowances to set against this income, reducing the tax further.
• Assets can be transferred to individual or joint names before sale to make the best use of both sets of capital gains exemptions. Additionally, higher rate taxpayers pay 20% tax on most gains and 28% on gains from residential property (excluding the main residence), while basic rate taxpayers pay 10% and 18% respectively.

Marriage allowance is only available for basic rate taxpayers, so unfortunately is not an option for reducing a higher rate tax liability.

If you follow some of these options, it’s likely that you can save a reasonable amount of tax every year.

Please don’t hesitate to contact a member of the team to find out more about tax planning.