‘Success’ can look very different from one business professional to the next. One common indicator can be the amount of money being earnt, with many striving to earn as much as possible. However, with this comes the distinct possibility that you will reach the threshold for the higher rate of tax, with many viewing this as a negative. Despite this extra cost though, there are a still several benefits and opportunities when reaching this level, let’s explore these in more detail.
Improved pension contributions
Higher tax earners can take advantage of excellent tax relief on pension contributions. This can help to reduce taxable income which leads to considerable tax savings. Alongside this is the ability to maximise pension contributions leading to a larger retirement fund, which can grow organically thanks to the fluctuating interest rates.
Access to tax efficient investment options
A higher rate tax earner can access better ISA allowances which allows tax-free growth for investments up to a specific limit. There are also other schemes such as EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme) which, through the investment in specific companies, provides excellent income tax and capital gain tax relief.
Charitable donations
There is some additional tax relief available through the gift aid scheme which can be claimed by a higher taxpayer on any charity donations, again which helps to reduce an overall tax bill. By contributing to charities there is a reduction on taxable income along with the satisfaction of giving back to a worthwhile cause.
Salary & bonuses
If required, choices can be made on salary sacrifices which can be used for additional pension contributions, childcare vouchers and initiates such as the cycle to work scheme. All of these can help to reduce taxable income. Other items such as the structuring of bonuses or stock options in a tax efficient form can further help to minimise tax liabilities whilst maximising income.
Allowances and reliefs
Finally higher earners can take advantage of capital gains tax allowance which allows a certain amount of profit from a sale of assets, to be tax free. This means business assets can be effectively managed resulting in significant tax savings. Finally, where eligible a partner can use the marriage allowance by transferring a portion of their unused personal allowance to a higher earner partner which again will reduce their overall tax bill.
So, to conclude, whilst a higher earner will obviously have to pay more tax, as we have demonstrated, there are several benefits and tax planning opportunities which can help. They key takeaway is you can mitigate your tax burden and optimise your financial standing. As always it is better to consult with a financial or tax advisor to map out a clear strategy to achieve better success.
If you have any questions or would like to discuss this further, please call our team on 01173 700 079 or e-mail hello@steppingstonesaccountancy.co.uk.
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