As a six-figure earner in the UK, careful tax planning is essential to make the most of your income. By using these 3 strategies, you can reduce your tax bill and grow your wealth.
1. Increase Your Pension Contributions
Contributing to a pension is one of the most effective ways to reduce your taxable income.
The government offers tax relief on pension contributions at your highest rate of income tax.
For 6-figure earners, pension contributions are particularly valuable as usually income tax relief on contributions is at a rate higher than you’ll pay on withdrawals in retirement.
Pension contributions can also help you avoid the “60% tax trap.” This trap affects income between £100,000 and £125,140, where the gradual withdrawal of the Personal Allowance (£12,570) leads to an effective tax rate of 60%. Redirecting income into your pension can help preserve this allowance and reduce your overall tax liability.
The annual allowance for pension contributions is £60,000 in the 2023/24 tax year, although it may be lower for those earning above £200,000. Unused allowances from the previous three tax years can also be carried forward to maximise contributions. Seek financial advice if you’re unsure about your annual allowance position (book a call here).
You can find out more about how you can contribute to your pension as an employee here and ensure you receive the maximum tax saving.
2. Make Use of Tax Wrappers
Tax-efficient savings and investment options can significantly reduce your tax bill while helping to grow your wealth. Two key options are:
ISAs (Individual Savings Accounts): With an annual ISA allowance of £20,000, ISAs allow your savings and investments to grow free from income tax and capital gains tax. They are a straightforward way to protect your wealth from tax while keeping your investments accessible.
Pensions. Contributions receive income tax relief (within contribution limits), investments can grow tax free within a pension and you can withdraw 25% tax free cash from age 55 (rising to 57 in April 2028) to a maximum of £268,275, remainder taxable as income at your marginal rate of income tax.
Investment Bonds: These can be an effective tool for long-term planning. Investment bonds allow you to defer tax until you withdraw funds. Withdrawals up to 5% of the original investment each year are treated as a return of capital and are not immediately taxable. This can be particularly useful if you expect to move to a lower tax band in the future.
3. Utilise Your Spouse’s Tax Allowances and Lower Tax Rate
If you are married or in a civil partnership, you can benefit from your spouse’s allowances and potentially lower tax rate. Some strategies include:
Transferring Income or Assets: If your spouse is in a lower tax band or pays no tax, transferring income-generating assets such as savings or investments to their name can reduce the overall tax liability.
Personal Allowance: Your spouse can earn up to £12,570 tax-free. Ensuring this allowance is fully used can save significant amounts in tax.
Dividend and Capital Gains Allowances: Both you and your spouse have separate allowances for dividends (£500 for 2023/24) and capital gains (£3,000 for 2023/24). Sharing assets between you can maximise these exemptions.
Final Thoughts
Tax-saving strategies for high earners require careful planning to ensure they are compliant and effective. By increasing pension contributions, making use of tax-efficient wrappers, and leveraging your spouse’s allowances, you can significantly reduce your tax burden.
Consult a qualified financial adviser to develop a strategy tailored to your circumstances, ensuring your wealth grows in the most tax-efficient way possible.
Risk warnings
The blog above does not constitute financial advice and is meant to be used as guidance only.
You cannot access your pension until age 55 (increasing to 57 from 2028).
Remember that when investing your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.