Personal tax planning tips for higher earning individuals

It is no surprise that with greater earnings comes more tax and with the top rate of income tax being 45% for individuals earning over £150,000 it can be useful to consider some strategies which may help in ensuring you do not pay more tax than necessary. Outlined below are some personal tax planning tips and although simple, these can be very effective.

ISA Allowance

For the current 2021/22 tax year, the maximum you can save in an ISA is £20,000. Any interest earned on this amount will be tax free as opposed to interest earned on money invested in non-ISA savings accounts. Utilising your full ISA allowance is an effective way of minimising tax on savings income and as long as any savings or investments stay within the tax-free ISA wrapper, you will continue to earn interest and reap the tax benefits until you withdraw the money.

Tax Efficient Investments

The government offer some attractive income tax reliefs on investments in small companies, namely Enterprise Investment Schemes (EIS), Seed Enterprise Investment Schemes (SEIS) and Venture Capital Trusts (VCT). If you were to invest in an EIS company, tax relief of 30% could be claimed on investments up to £1,000,000 in one tax year, giving a maximum tax reduction in that year of £300,000 to offset against your tax liability for the year. However, if your tax liability is less than the 30% tax relief, the relief is restricted to your tax liability amount. The same would apply if you were to invest in an SEIS company, however as these tend to be riskier the tax relief on offer is 50% on amounts invested up to £100,000. Investments in a VCT would offer an income tax relief of 30% by subscribing for up to £200,000 shares.

It is important to note that these are high-risk investments which may not always turn out to be successful, however should you have any spare disposable income this may be an option for you. If this is something you are interested in, we would advise that you seek the appropriate advice before proceeding.

Full Personal Allowance

When an individual’s adjusted net income exceeds £100,000, their tax-free personal allowance is reduced by £1 for every £2 of the excess. This means that individuals with adjusted net income of £125,140 or more will have no personal allowance in 2021/22. For these purposes, adjusted net income is taken as an individual’s total taxable income before taking into account their personal allowance, less any gift aid or pension contributions.

If your adjusted net income is above £100,000, this can be reduced to maximise your entitlement to the full personal allowance by making gift aid contributions to charity or contributions to your personal pension.

In addition to helping maximise your entitlement to the full personal allowance, gift aid and pension contributions can provide some tax relief against your income tax liability by extending the basic and higher rate tax bands, resulting in a greater proportion of your income being taxed at tax rates lower than 45%.

It is important to note that with pension contributions, there is an annual allowance limit for all gross contributions of £40,000 each year and if contributions exceed this amount a charge may be incurred. Your annual allowance amount may also differ depending on your level of income as those with a taxable income over £240,000 will have their annual allowance restricted. If you would like any advice with regards to the potential tax impacts of making pension contributions, our financial planning team can assist.

Values of investments can fall as well as rise and there is no guarantee that an investor will receive a return of their original capital, especially in the early years.

The content of this article should in no way be considered to be a personal recommendation. No action should be taken without seeking further formal advice.

Whether or not an ISA, Pension or tax efficient investment scheme is suitable for you will depend on your personal circumstances and objectives; they may not be suitable for everyone.

MHA Moore and Smalley and is registered to carry on audit work in the UK by The Institute of Chartered Accountants in England and Wales and is authorised and regulated by the Financial Conduct Authority and details of our registration can be viewed at https://register.fca.org.uk/ under reference number 448716.