Higher Rate Tax Earner – What Can I Do To Save Tax?Written on September 11, 2024 by Kirk Rice LLP
The Question:
My total income for the current tax year will be around £70,000. I am employed and as this makes me a higher rate tax earner, I assume there is very little I can do to save tax, any ideas?
Kirk Rice LLP answers:
As a higher rate tax employee taxed under PAYE you can be limited to the options available to reduce your tax liability, but there are some areas which should not be overlooked to ensure that savings are made where possible.
There are a few ‘cliff edge’ thresholds in tax to bear in mind and I have expanded on those which are likely to be more relevant in your circumstances:
- Higher rate tax threshold of £50,270 – For taxpayers with an income exceeding this amount, it is crucial to consider what action can be taken to reduce exposure at the higher rate. In year pension contributions and gift aid contributions in the year or subsequent year will reduce the amount paid at these thresholds.
- Clawback of child benefit for incomes over £60,000 – a taxpayer is subject to the high-income child benefit charge if income exceeds £60,000 by requiring 1% of benefit to be repaid for every £200 of income over the threshold. This means that the benefit is totally lost at an income of £80,000. This can lead to very high marginal rates where child benefit is claimed for a large number of children – for four children this is 60%.
- Loss of personal allowance for incomes over £100,000
- Additional rate tax threshold of £125,000
For example, if you have two children aged 10 and 8 then in the current tax year you will receive child benefit of £2,212.6. Because your income is more than £60,000 (and I have assumed that your spouse earns less than £60,000) then you would be required to repay £1,106 of the child benefit.
However, if you instead decided to make personal pension contribution in the tax year (2024/25) of net £8,000 then you would not have to repay the child benefit, as this has the effect of reducing your income for calculating the charge. HMRC would add a further £2,000 to your pension pot to make a total £10,000 contribution which would be an added benefit. You will also be entitled to higher rate tax relief on the contribution of £2,000. In summary a £10,000 contribution to your pension pot would only cost you £4,894 (£8,000 less £1,106 and £2,000).
From 2024/25, if you have any income from savings there is a tax free savings rate band of £1,000 for basic rate taxpayers and £500 for a higher rate tax payer. Wherever possible, married couples should review how their savings are held between them to ensure that their allowances are maximised and to avoid unnecessary tax charges.
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If you would like advice on any tax matter please please call us on 01344 875 000. Alternatively, email us at info@kirkrice.co.uk.
This article was updated and correct on 11/09/2024.
Please note: This article is correct as at the publication date. The answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of relief from taxation are subject to change. The Financial Conduct Authority does not regulate tax planning.
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