Top Tax Tips for High Earners

What is a high earner?

There are a few ‘stages’ at which we tax advisers may consider an individual to be a ‘high earner’ and these stages arise because there are a certain levels at which tax planning opportunities arise specifically because of a person’s income. 

For example – a person may be regarded as a high earner when they are earning £60,000 or more as at this level any entitlement to Child Benefit will be lost.

For those earning just above £100,000 this is where entitlement to the tax free allowance starts to be withdrawn. 

And anyone earning over £150,000 is subject to the top rate of tax of 45%.

In all cases these are people who would benefit from taking measures to reduce their relevant income.

Top Tips

I will talk you through 4 top tips which are designed to be easy for you to take the initiative with. I will not go into the use of Trusts (which can be a very useful area for High Net Worth individuals) as this is an area which requires detailed and personalised professional advice.

1: Income Equalisation

Where a high earner is married to or in a civil partnership with someone who either does not work or who is not a higher rate or top rate tax payer there are potential savings to make. 

The higher earning spouse may shift income over to the lower earning spouse to make sure that all personal allowances and basic rate bands are fully utilised. This can be a particularly lucrative tip as the actual transfers of assets or cash to spouses themselves are exempt from tax. 

Popular assets to transfer include income bearing investments (i.e. money held in savings accounts), dividend bearing shares and rental properties. 

2: Gift Aid

It seems to be easily forgotten but gift aid, donating to charities, can be a very tax efficient thing to do.

A top rate tax payer can save 30% of the gross donation in tax, so it is important that you tell your adviser about any charitable giving you have been doing during the year.  In real terms that’s £30 of saved tax for an £80 donation... 

Gift Aided donations also reduce ‘Net Relevant Income’ which is used when calculating entitlement to Child Benefit and Personal Allowances. 

There are a few ‘rules’ which make the donations eligible for these reliefs but it’s very easy to qualify and your adviser should be able to talk you though it. 

3: Make Sure You Declare Everything

A common mistake I find is that people feel that Self Assessment is just for people to declare their trading income, or perhaps if they’ve had a special investment mature but actually it is  designed to collect information on all of a taxpayer’s income, not just income from business sources. Bank interest from all accounts (but not ISAs) must be shown on the tax return as must all employment income, rental income and expenses and dividend income. Various institutions send HMRC your income details each year and if there is a discrepancy then HMRC may raise an enquiry. 

Dealing with an enquiry and paying the associated fines for not declaring all of your income is not only stressful but can also be costly. 

4: Plan Ahead

Whether you are thinking of investing or selling an investment it is a good idea to speak to an adviser first. 

Something as simple as the date of making an investment can have a huge effect on the amount of tax you pay – and likewise, the date of selling an investment can see your tax bill go from £££ to zero. 

It is tempting to leave planning as an after thought but it really can save you big money. Find an adviser you feel comfortable speaking to and who is easy to contact and then utilise them!

For further information/advice please contact Robyn Milstead on 01932 830664 or email: robyn.milstead@wardwilliams.co.uk