The end of the financial year is coming. 5 April is crunch time for making businesses and individual estates as tax efficient as possible.
For higher rate taxpayers – earning between £50,271 and £125,140 – this is a particularly important time to save on Income Tax and minimise additional tax liabilities.
With the deadline fast approaching, it’s time to take a look at how you can reduce your net income below the higher rate threshold or otherwise save on your tax bill.
Higher rate tax bills explained
As we’ve said, if you earn between £50,271 and £125,140, you’ll be a higher rate taxpayer.
As an example, this is the breakdown of Income Tax for a person with an income of £65,000 per annum:
- On £12,570 – Tax-free allowance (0 per cent)
- On £37,700 – Basic rate (20 per cent or £7,540)
- On the final £14,730 – Higher rate (40 per cent or around £5,890)
The person in this example would end up paying around £13,430 in Income Tax – roughly 21 per cent of their total income.
Clearly, failing to optimise tax liabilities can create a heavy financial burden for higher rate taxpayers – so it’s important that you plan to maximise your tax-free allowances.
However, minimising Income Tax liabilities is not the only reason why you should be planning to use tax reliefs before the end of the financial year.
Dividends and Capital Gains Tax
Being a higher rate taxpayer does not only impact how much Income Tax you have to pay.
Certain other income, such as dividends or gains on the disposal of assets, may be subject to a higher rate of tax depending on your main rate of income.
When you sell an asset and make a gain, you may be taxed on that income. For higher rate taxpayers, Capital Gains Tax is payable above the annual allowance of £6,000 at a rate of 20 per cent (or 28 per cent from residential property).
Similarly, dividends above the £1,000 allowance are taxed at a higher rate of 33.75 per cent (as opposed to 8.75 per cent at the basic rate).
High Income Child Benefit Charge
One of the major difficulties faced by families where one partner is just over the higher rate threshold is the High-Income Child Benefit Charge.
You’ll have to pay the charge if you or your partner earn over £50,000 and you claim Child Benefit. If this applies to both of you, the higher earner is responsible for paying the charge.
This also applies if someone else’s child lives with you and the parent contributes at least an equal amount towards the child’s expenses.
If you earn over this threshold, you will have to pay one per cent of the total Child Benefit received for every £100 you earn over £50,000.
For earners around or just above this threshold, a small reduction in your taxable or overall income could result in significant savings.
Preparing for a tax efficient 2024
To make sure that you aren’t paying more tax than you need to, there are a number of ways that you can effectively reduce your net income. You can:
- Make pension contributions – This tax year you can contribute up to £60,000, more if you have unused allowance for prior years and, if you make a contribution to a personal pension, you will pay less tax at the higher rate.
- Pay into an ISA – The ISA savings limit is £20,000 per tax year and savings generate tax-free income.
- Capital Gains allowances – If you’re considering selling an asset and expect to make a gain on the value you paid for it, then you’ll pay tax on gains above your allowance of £6,000, so consider bringing sales forward if you haven’t used this allowance or pushing them back if you have.
- Giving to charity – You can reduce your taxable income by taking part in a Payroll Giving scheme, allowing you to donate to charity directly from your wages.
- Gifting – Although not specifically aimed at reducing your Income Tax bill, you can gift up to £3,000 per year without paying any Inheritance Tax if you were to die within seven years of making the gift, ultimately making that income tax efficient.
- Venture capital schemes – Buying shares in certain growing businesses can make you eligible for tax reliefs.
These initiatives and allowances are aimed at helping you minimise your tax liabilities while staying compliant with regulations and maintaining your National Insurance record for State Pension purposes.
We understand that it can be complex to manage your financial situation and plan for tax. We can support you through the process and help you make your income work for you and your family.
For advice on tax planning for higher rate taxpayers, please get in touch with us today.
