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A High Earner’s guide to the Tax landscape

For many, tax matters are relatively straightforward, with income neatly managed through PAYE. However, if you’re a high earner, bringing in over £100,000 annually, or part of a family claiming child benefit with an earner exceeding £50,000, the tax landscape can become decidedly more complex. Government regulations may result in the loss of benefits, potentially pushing your tax burden as high as 62% or even causing double taxation on pension contributions.

This guide is here to shine a light on the potential pitfalls and help you navigate them. We’ll also explore tax planning strategies that can mitigate these issues while enhancing your overall financial strategy.

Potential Tax pitfalls you should watch out for:

Additional Compliance

Earning over £100,000 means you’re required to submit a self-assessment tax return, even if your entire income has already been taxed under PAYE. HMRC will notify you of this obligation, and severe penalties apply for failing to comply, regardless of whether you owe additional taxes.

Adjusted Net Income

Your adjusted net income plays a pivotal role in the additional tax charges and relief restrictions high earners face. It is calculated as your total taxable income (pre-Personal Allowance) but after certain tax reliefs:

  • Trading losses (for the self-employed or those in partnerships)
  • Charitable donations through Gift Aid
  • Pension contributions

The Personal Allowance:

While most taxpayers enjoy a personal allowance, currently £12,570, that allows them to earn income tax-free, high earners face a reduction in this allowance if their Adjusted Net Income exceeds £100,000.

However, under rules announced in 2010, your personal allowance reduces by £1 for every £2 you earn above £100,000. If you earn £125,140 or more, you’ll lose your personal allowance altogether. And somewhere in between £100,000 and £125,140 you could find yourself in the 60% tax rate personal allowance trap.

Child Benefit:

If you or your partner receive child benefit, and one of you earns over £50,000 in the 2022/2023 tax year, additional tax measures may be applied to recoup some or all of the benefit received. The tax increase is determined based on the amount by which your “adjusted net income” exceeds £50,000. This difference is divided by 10,000 and multiplied by the actual benefit received.

Earning £60,000 or more in the 2022/2023 tax year will lead to the full recovery of child benefit. In such cases, it may be simpler to opt not to receive child benefit to avoid the associated tax implications.

Tapering of Annual Pension Contribution Allowance

While most individuals can benefit from significant tax advantages by contributing up to £40,000 annually to their pension(s) for the 22/23 tax year, these benefits are curtailed if your adjusted income exceeds £150,000, with threshold income surpassing £110,000.

Under these circumstances, your annual pension contribution allowance diminishes by £1 for every £2 of taxable income over £150,000, subject to a minimum allowance of £10,000 (which applies to those earning over £210,000).

Both Adjusted Income and Threshold Income encompass all taxable income sources, including investment income, savings income, and benefits in kind like medical insurance premiums. However, Adjusted Income also considers all pension contributions made throughout the year (including employer contributions), while Threshold Income excludes pension contributions, whether made by you or through salary sacrifice arrangements.

To mitigate this impact, especially in the initial years, you can carry forward unused annual allowances from the previous three years. If you anticipate being affected by the tapering of your annual pension allowance for the 22/23 tax year, seeking professional advice from an accountant is advisable.

Here are some Tax planning opportunities, from our experts.

1. Pension Contributions

Pension contributions remain a highly tax-efficient investment, especially advantageous for higher earners. They play a vital role in reducing Adjusted Net Income, potentially leading to tax savings of up to 60%.

When pension contributions are made through salary sacrifice in the 22/23 tax year, they also circumvent National Insurance Contributions, increasing your overall savings to 62%. It’s worth noting that some employers choose to pass on this saving to their employees, further enhancing the benefits, resulting in total savings of over 75%.

However, it’s important to remember that while these contributions offer significant tax advantages, the pension income received during retirement remains subject to income tax. This means that the tax savings achieved through pension contributions can be seen as a deferral of tax rather than a complete exemption.

2. Other Salary sacrifice arrangements

The advantages of salary sacrifice extend beyond pension contributions. Some, though not all, arrangements with your employer can also save you Income Tax and National Insurance Contributions:

  • Childcare vouchers (subject to limitations)
  • Cycle to work schemes
  • Ultra-low emission vehicles and company cars
  • Retraining courses and outplacement services
  • Purchasing additional annual leave

These arrangements can save up to 62% in taxes, depending on your Income Tax rate.

3. Charitable Donations

Donations made under Gift Aid offer tax advantages to both the recipient organization and higher-rate taxpayers. While the organization benefits from a 20% uplift in your donation, you, as a higher or additional rate taxpayer, can claim additional tax relief from your Income Tax.

Notably, such donations are deducted from your income when calculating Adjusted Net Income, further saving up to 60% in taxes.

4. Making Tax-Efficient Investments

While these investments won’t directly alleviate the tax pitfalls for high earners, they remain crucial for tax planning. Tax-efficient investments encompass various options and can provide substantial benefits.

These investments may include tax-efficient ISAs, Venture Capital Trusts (VCTs), and the Enterprise Investment Scheme (EIS). Properly structured, these investments can help minimize tax liabilities. However, it’s essential to consult with professionals who specialize in high-earning tax management to ensure your financial goals and aspirations remain within reach.

Ready to master Self-Assessment?

One of the most significant challenges high earners face is navigating the intricacies of self-assessment tax returns. With complex financial portfolios, multiple income streams, and various deductions, self-assessment can quickly become a daunting task.

  • Personalized Self-Assessment support

At AccNet, we understand that no two high earners are alike. Each financial situation is unique, and your self-assessment should reflect that. Our team of tax experts will work closely with you to provide personalized self-assessment support tailored to your specific circumstances.

  • Streamlined documentation

Gathering all the necessary documents for your self-assessment can be a time-consuming and overwhelming task. AccNet can simplify this process by helping you organize your financial documents efficiently. We’ll create a checklist tailored to your financial profile, ensuring that nothing is overlooked.

  • Accurate Reporting

Accuracy is paramount when submitting your self-assessment. Any errors or omissions can lead to potential penalties and additional stress. With our guidance, you can be confident that your self-assessment is not only completed on time but is also accurate and compliant with HMRC regulations.

  • Tax optimization

Self-assessment isn’t just about fulfilling your tax obligations; it’s an opportunity to optimize your tax position. Our keen experts will review your financial information to identify eligible deductions, tax credits, and reliefs that can reduce your overall tax liability. Our goal is to ensure you retain more of your hard-earned income.

Ready to take the plunge?

Understanding and managing the tax issues that high earners face requires expertise and a tailored approach. To make the most of your income, reduce your tax liabilities, and ensure your financial future is secure, it’s essential to work with professionals who specialize in high-earning tax management.

Here at AccNet, we understand that every journey is unique. Contact us today to discover how our services can optimize your financial position for years to come.


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