Tax strategies for high earners

Tax planning is critical for anyone with a high income, balancing between taking home as much of your earnings as possible and staying within the boundaries of tax laws.

By delving into opportunities such as allowances, deductions, and investment opportunities, we aim to arm you with the knowledge to make informed decisions that align with both your financial goals and legal responsibilities.

We’ll walk you through the essentials of tax strategies, shedding light on effectively managing your taxes without stepping over any lines.


Maximise your ISA contributions

ISAs are a cornerstone of tax-efficient savings, allowing you to earn interest or gains without tax implications.

The yearly £20,000 allowance is worth maxing out if possible and covers different types of ISAs, including Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs, and Lifetime ISAs.

Also, be aware of the new British ISA which was announced in the recent Spring Budget. The British ISA introduces an additional £5,000 tax-free allowance for investments in UK assets, supplementing the existing £20,000 limit. This move seeks to benefit British savers and support promising UK businesses by providing them with essential capital for expansion.


Pension contributions

Pension contributions remain one of the most tax-efficient ways to save for retirement. Contributions up to £60,000 per year (or 100% of your earnings, whichever is lower) can receive tax relief at your highest income tax rate.

For high earners, particularly those with income over £100,000, pension contributions can also help mitigate the loss of your personal allowance, which reduces by £1 for every £2 of income above £100,000.


Leverage tax-efficient investments

For high earners looking to leverage tax-efficient investments, the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), and Venture Capital Trusts (VCTs) offer attractive benefits, combining the potential for tax reliefs with opportunities to support growth in innovative businesses.

  • Enterprise Investment Scheme (EIS): EIS offers up to 30% income tax relief on investments up to £1 million per tax year, which can increase to £2m if the excess over £1m is invested in knowledge-intensive companies (KICs). Additionally, EIS provides 100% relief from Capital Gains Tax (CGT) on any gains from the sale of shares, provided the shares are held for at least three years, and income tax relief is claimed on them. Investors can also defer CGT on gains reinvested in EIS-qualifying shares and claim loss relief against income tax for any losses incurred on their EIS investments. Notably, EIS investments that have been held for at least two years are exempt from Inheritance Tax​​​​​​​​.
  • Seed Enterprise Investment Scheme (SEIS): SEIS is designed to help early-stage companies raise equity finance by offering tax reliefs to individual investors who purchase new shares in those companies. It offers a more generous 50% income tax relief on investments up to £100,000 per tax year. Like EIS, SEIS allows CGT exemption on gains and provides loss relief against income tax. Additionally, investors can benefit from CGT reinvestment relief, which is available when capital gains from other assets are reinvested into SEIS-qualifying shares​​​​.
  • Venture Capital Trusts (VCTs): VCTs are designed to encourage investment in small, higher-risk companies by offering attractive tax reliefs to investors. By investing in a VCT, individuals can receive up to 30% income tax relief on investments up to £200,000 per tax year, provided the shares are held for a minimum of five years. In addition to this upfront tax relief, VCT investors benefit from tax-free dividends and CGT exemption on any gains made from their VCT shares.

These schemes are subject to specific conditions, such as the requirement for the invested company to remain qualified under the scheme’s rules and for the investor to hold the shares for a minimum period to retain the tax reliefs.

Consulting with a financial advisor is advisable to ensure these strategies align with individual financial goals and circumstances.


Inheritance tax (IHT) planning

IHT planning is essential to managing your estate to ensure your loved ones benefit most from their inheritance.

  • Use gift allowances: You can reduce your estate’s value for IHT purposes by using gift allowances. You can give away gifts up to £3,000 each year without them being added to the value of your estate for IHT purposes. Gifts between spouses or civil partners are also exempt from IHT​​.
  • Give gifts: Any gifts you give seven years before your death are not usually subject to IHT. This rule encourages early estate planning and gifting to reduce the taxable estate​​.
    Place assets into trust: Trusts can effectively manage and protect your assets, potentially reducing IHT liability. It’s advisable to consult with a professional to ensure trusts are set up correctly and align with your financial goals​​.
  • Alternative Investment Market (AIM) shares: Some investments in AIM-qualified companies can be held outside of your estate for IHT purposes if held for at least two years, offering a potential route to mitigate IHT​​.
  • Donate to charity: Donations to charity from your estate can reduce the IHT rate on the remainder of your estate if at least 10% of the net estate is left to charity, potentially reducing the IHT rate from 40% to 36%​​​​.
  • Business reliefs: For business owners, Business Relief can provide reductions in IHT on business assets, ranging from 50% to 100%, depending on the assets. This relief is crucial for passing on a business without selling it to cover IHT liabilities​​​​.
  • Life insurance policies: Placing your life insurance policy into a trust can ensure that the payout is not considered part of your estate for IHT purposes, providing a lump sum to your beneficiaries outside of the taxable estate​​.


Final thoughts

Effective tax planning is dynamic, requiring regular review and adjustment to align with changing laws and personal circumstances. While these strategies offer a foundation, they barely scratch the surface of what’s possible with comprehensive planning.

Whether you aim to safeguard your wealth for future generations, fund your ambitions, or simply ensure a comfortable retirement, understanding and applying these tax strategies is crucial.

At Pearson May, we understand the complexities of UK tax law and the unique challenges high earners face.

Contact us today to explore how we can assist you in achieving your financial goals and ensuring your wealth works harder for you.

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