Tax Planning Tips for High Earners

Post by Mearns & Company in News

In today’s shifting tax landscape, understanding tax planning is crucial, especially for higher earners.

In this blog, we’ll explore strategies suggested by Edinburgh’s leading independent financial planners, Mearns & Company, to help you optimise your income and savings while navigating the complexities of tax laws.

Nothing brings our expert financial advisers more satisfaction than helping clients make tax savings so they can free up more of their hard-earned money and share it with their families! If you are a high earner, read on for top tax planning tips from Graeme McInally and Aurelija Buckute.

The value of tax efficiency

While some might deem it an annual evil, effective tax planning is essential to ensure you’re not paying more than your fair share, particularly with rising rates, falling exemptions, and frozen thresholds.

With Scotland boasting the highest number of tax bands in the UK, staying informed about tax developments is critical, especially for higher and top-rate taxpayers already shouldering significant financial burdens.

Unlocking pension power

Unlocking the power of your pension begins early, regardless of your income level. Leveraging pension contributions can yield significant tax benefits, including income tax relief, tax-free returns, and even inheritance tax exemptions.

Pensions these days typically offer flexible retirement options (after minimum pensionable age), not to mention benefits for beneficiaries. For example, with careful planning, your pension fund can be passed on to family members tax-efficiently.

It is, therefore, worth acting now to take advantage of the current pension rules, while helping to secure you and your family’s future.

Leverage Gift Aid

If you look after the pennies the pounds will take care of themselves, and a simple way to safeguard additional income is to ensure your charitable donations are being made in the name of the higher-rate taxpayer. By making this name switch you could benefit from tax relief similar to pension contributions, even for small sums.

Limited Company Benefits

For the self-employed or those earning income from property, incorporation – becoming a limited company (LTD) – can offer flexibility in terms of tax-efficient income. However, it is essential that other factors are considered.

If you already have a limited company, you can consult with your accountant to explore strategies such as employing family members or distributing dividends to them as shareholders, to mitigate NICs and income tax. As a business, you should also ensure your business cash is earning competitive interest.

Alternative tax wrappers

Exploring tax-efficient investment options like ISAs, trusts and specialised schemes can allow you to further diversify your portfolio and minimise tax exposure. By investing in specialised Venture Capital Trusts (VCT) or Enterprise Investment Schemes (EIS), higher earners have the potential to enjoy a 30% reduction in income tax liability.

While these qualifying schemes are an option, it is essential to consult with an expert financial planner for guidance as all investment schemes carry risks.

Shielding assets from tax

With your after-tax income considered, you need to think about taking steps to shield your assets from tax.

For any shares and savings not held within an ISA or pension, higher earner shareholders will be subject to UK dividend tax. It is worth noting that, from 06 April 2024, the current annual tax-free dividend allowance of £1,000 will be reducing to £500, so now is the time to consider alternatives. Take a look at some of the options below:

• ISA Allowances

You can use annual ISA allowances of £20,000 (£40,000 for a two-person household) to benefit from tax-free growth, interest, dividends, and withdrawals.

• Pension allowances

You can use annual pension allowances of up to £60,000 (plus unused allowance from previous three years). However, for personal/employee pension contributions, you are limited to your earnings or £3,600 (whichever is lower) each year. Pension contributions for non-working partners can earn £720 tax relief, despite them being a non-taxpayer.

• Splitting the savings

By transferring taxable savings to a spouse or partner, you can make use of both pension and savings/dividend/CGT allowances, especially if they are a lower-rate taxpayer.

• Consider investment bonds

You can defer tax for future benefits, allowing potential tax-efficient drawdowns in retirement.

• Offset future gains with capital losses

It is important to bear in mind that you can declare losses from taxable investments to HMRC to offset future gains and reduce tax liabilities.

Conclusion

In today’s environment, proactive tax planning is essential. By leveraging allowances, exploring investment options, and maximising contributions, high earners can navigate the tax landscape confidently, ensuring more of their hard-earned income remains in their pockets. In an ever-evolving financial landscape, proactive planning is the key to financial security.

If this blog has prompted you to kickstart your tax planning, please contact our tax planning team  for tailored advice.

This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.  The Financial Conduct Authority does not regulate tax or trust advice.