Learn how to manage your finances, minimise tax liabilities, and understand higher rate tax brackets for effective tax planning.
Strategic tax planning is essential for managing your finances and minimising tax liabilities. Typically, this process is most effective when done with the assistance of a professional, such as a UK tax adviser or financial adviser, who can assess your needs and refer you to a tax specialist if necessary.
It's important to note that tax advice and treatment are based on individual circumstances and may change over time. This guide aims to outline the key points and terms related to higher rate tax but does not constitute formal advice.
In England, Wales, and Northern Ireland, individuals earning over £50,271 annually fall into the higher rate taxpayer category, subject to a 40% income tax. Those earning over £125,140 are classified as additional rate taxpayers and are taxed at 45%.
In Scotland, the tax bands are slightly different. Higher rate taxpayers pay 42% on earnings between £43,663 and £75,000, 45% on earnings between £75,001 and £125,140, and 48% on earnings above £125,140.
For individuals in these higher tax brackets, effective tax planning is crucial to identify opportunities for reducing tax payments, saving more, and planning for the future.
Contributing to a pension is one of the most tax-efficient ways to save for retirement. You can contribute up to 100% of your earnings tax-free to a pension, with a maximum annual limit of £60,000. Once this annual limit is exceeded, you will pay tax on your contributions.
As a higher or additional rate taxpayer, you benefit from 40-45% in tax savings. This applies to both workplace and personal pensions, although for self-invested personal pensions you will need to claim the additional 20-25% relief through a self-assessment tax return, your pension provider will claim the basic rate relief of 20% for you. Typically, with a workplace pension you get the relief directly through payroll, so you do not need to file a self-assessment return.
If you're employed, increasing your pension contributions often means your employer will increase theirs too. Check your pension policy documents for details on how you can take advantage of this benefit. Keep in mind that pension funds are not accessible until you reach retirement age, currently set at 55 but increasing to 57 from April 2028.
Individual Savings Accounts (ISAs) allow you to save up to £20,000 tax-free each tax year. There are different types of ISAs to suit various needs:
From April 2024, you can contribute to more than one of each ISA type per year (excluding LISAs and JISAs), with different providers, with the total investment limit remaining at £20,000.
Salary sacrifice schemes allow employees to exchange part of their salary for non-cash benefits, such as extra holiday. This reduces taxable income, saving on tax and/or National Insurance. For example, a taxpayer near the next tax bracket could reduce their tax and National Insurance by sacrificing some salary for non-cash benefits. However, participating in salary sacrifice may mean declaring a lower income with some lenders when applying for mortgages or loans, potentially reducing borrowing capacity.
If you own company shares, you may receive dividend payments. While taxable, you have a dividend tax allowance each year. For 2024/2025 onwards, this allowance is £500, meaning you only pay tax on dividends above this amount. The dividend allowance is the same for everyone and cannot be carried over to the next year.
Selling an additional property or asset where the gain is more than £3,000 (excluding vehicles and certain other assets) may incur capital gains tax. Everyone has a capital gains tax allowance, which has decreased in recent years. From 2024/2025, you pay capital gains tax on gains over £3,000, and this is expected to stay at the same level for the tax year 2025/26. The tax rate depends on your tax band. Basic rate taxpayers pay 18% and higher and additional rate taxpayers pay 24% on additional residential property and other chargeable assets. Certain assets are exempt from capital gains tax.
If selling a property that was once your main home, you might qualify for a reduction in capital gains tax. Reliefs are also available for the disposal or transfer of a business. These are complex areas, so consult a tax professional for personalised advice.
Tax planning can be a complex area, and it’s important to understand your options. Engaging with a tax professional can be beneficial, as they can assess your individual situation and make recommendations to support you.
This article is for information purposes only. It is not intended as investment advice.
The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors might not get back their initial investment.
Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.
