Review by Ryan Carman ATT, Head of Operations at RIFT Tax Refunds

Congrats, you’re a high earner! But a bigger salary means more tax to pay. Yet, there are ways you can reduce your tax bill. Let’s take a look at the rules around tax for high income earners and touch on some expert tips to reduce your spend with the taxman.

Tax strategies for high income earners

If you’re a high earner, you pay more in tax. The higher tax brackets are as follows:

  • Higher rate (from £50,271 to £150,000): Taxed at 40%.  
  • Additional rate (anything above £150,000): Taxed at 45%.  

You’ll also hear about a 60% tax rate too. This effectively comes into play as you chip away at your Personal Allowance when you earn over £100,000.

We each have a tax free personal allowance, which is £12,570. But once you earn over £100,000 you start to lose this at a rate of £1 for every £2 you earn over. Earning £1,000 over the threshold brings a tax rate of 40% (£400) but also knocks £500 off your personal allowance which means you pay another £200 in tax. That’s £600 in tax for £1,000 in earnings which is basically a tax rate of 60%.

It clearly makes sense to cut your tax bill as much as possible. Here are a few tips on how you can do it:

Pay into your pension

Increasing your pension contributions to get you under the £100k mark means you’ll hold onto your personal allowance. You can make a maximum of £40,000 a year in pension contributions. You might take home less each month, but you’ll still get your personal allowance and enjoy more tax breaks. Plus, you’ll have a healthier pension pot for retirement too.

Make charitable donations

Another way to reduce your earnings below £100k is to make charitable donations. Yes, again this will reduce your monthly income but you’ll still hold onto some tax breaks. And you’ll be doing good for something you care about. Charitable donations are tax free in the UK too.

Trade off company benefits

If you’re about to get a pay rise that will push you into the £100k bracket, consider any trade-offs you can get from your work instead. This could be a company car or private healthcare for example.

This is usually done through a salary sacrifice scheme which means the cash is taken from your pre-tax salary. Not only can this reduce your take home income to below the threshold, but it’ll also save you tax in the long-run on things you may have previously paid for from your post-tax salary.

Navigating high earner tax returns

Even if you’re an employee and you pay tax every month through the PAYE system in your payslips, you have to submit a Self Assessment tax return.

The first thing to note is that you won’t get taxed twice on the same income. HMRC wants you to submit a tax return so they can take a closer look at your money. You’ll likely be in a more complicated financial situation than the average earner, so they’ll want to check that everything is properly accounted for. These are the rules you must abide by:

  • You must first register for self assessment.  
  • You’ll need to use form SA100 to file your tax return.  
  • The deadline to do so is 31st January after the end of the previous tax year – 5th April the year before (you can get fined for filing late).  

HMRC will want a full and detailed overview of the money you have coming in and going out. They’ll want to know about your income sources. This includes employment, interest, pensions and share dividends. You’ll need to declare any employment benefits you get too, as well as allowable expenses.

It pays to get it right. If you don’t, not only could you be missing out on potential tax savings but you could also incur a fine for giving the wrong information. This can be as high as 70% of what you owe. Now if it’s a genuine mistake HMRC can lower the penalty by 30%, and as much as 40% if you actively try to help them. But if you’ve been found trying to hide the fact you’re cheating the system, the fine can be 100% of what you owe.

It can be a lot to get to grips with if you're not used to it and it's easy to drop the ball. Our specialist Self-Assessment tax return service is perfect for people with complicated tax situations. We take care of everything for you, working out your total taxable income and filing your returns. Our seasoned tax experts will save you money and keep you on the right side of HMRC - Ryan Carman ATT, RIFT's Head of Operations

Legal considerations for high earners

Legally, there are things you have to mention in your tax return. They include:

How much you’ve paid in pension contributions: If you’re a UK resident aged under 75 and you make personal contributions to a pension, you get tax relief on the amount you’ve paid in. If you’re a higher rate tax payer, you need to claim the 20 to 25% relief yourself. You must include the gross value of your pension contributions in your tax return.

If you’ve breached your annual allowance in your pension contributions: You have to declare this to HMRC.

If you’re claiming Child Benefit: When you earn over £50,000 and claim Child Benefit, you’re liable for the High-Income Child Benefit tax charge. This needs to be paid through self assessment. The charge increases gradually as your earnings increase. If you earn over £60,000 you have to pay the full amount back. You might think it’s not worth claiming child benefit at all, but if you don’t, you’ll miss out on any National Insurance credits that count towards your state pension.

Expert advice for high earners

There are other things you can do to make the most of your money when you’re a high earner:

  • Maximise the advantage of EIS investments: Investing in Enterprise Investment Scheme (EIS) investments (usually early stage start-ups and scale-ups) means you can claim up to 30% income tax relief on the value of your investment.
  • Always maintain your income tax allowance: Use some of the above tips to keep your earnings below £100k to hold onto your £12,570 allowance.
  • Use your ISA allowance: You have an ISA allowance of £20,000 per tax year with any returns free of income tax, capital gains tax and dividends tax. Consider investing in a stocks and shares ISA to grow your investments without paying the tax man.
  • Understand the capital gains allowance: If you make financial gain on an investment (outside of an ISA or another tax efficient investment) you have a capital gains allowance of £6,000 a year. Use it.

If you’re a high earner, you’ll want to make the most of your money and reduce your tax bill where possible. At RIFT Refunds, we can guide you through the whole process using our expertise, helping to cut your tax bill and maximising your income.

Our team makes tax relief easy and stress-free. We handle everything for you and provide personalised advice tailored to your situation. Get in touch with RIFT and start the process today.