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Planning for tax efficiency if you are a Higher Rate taxpayer

More people than ever have fallen into the UK’s higher rate tax bracket, with nearly one in every ten adults earning above the threshold.

    In April 2022, changes to the tax bands meant that earnings between £37,7001 to £150,000 now qualify for the 40% bracket.

    If you fall into the higher rate bracket, being efficient with how you plan for your tax obligations is essential. In this article we’ve explained some of the most common ways to plan ahead for the tax year. You can also call us for personalised financial advice on 01926 405 883.

    Pension payments

    Adding to your pension can help you in more ways than one when it comes to tax relief. Firstly, when you contribute to a company or private pension, your contributions are eligible for tax relief up to the value of £40,000. So, if you pay the higher 40% rate on any part of your income, you must remember to declare your pension contributions on your tax return to reap the benefits.

    Paying into your pension can also help you reduce the amount of taxable income you earn. The more you pay, the more the portion of your income that is taxed at 40% will decrease, so you’ll make a saving here too.

    Keep in mind that the upper annual limit for pension contributions is £40,000, but you are allowed to carry forward 3 years’ worth of unused pension allowances.

    Childcare Vouchers

    If you have young children that require childcare, you can exchange a portion of your salary for tax-free childcare vouchers. The amount that the vouchers are worth depends on your income tax band as follows;

    • Basic Rate taxpayer on 20% income tax – £243 childcare vouchers per month
    • Higher Rate taxpayer on 40% income tax – £124 childcare vouchers per month
    • Additional Rate taxpayer on 45% income tac – £100 childcare vouchers per month

    Tax-free childcare vouchers are a salary sacrifice scheme and can affect any other tax credit or childcare benefits you receive. So, make sure you do your own calculations and weigh the benefits before opting into your employer’s childcare voucher scheme.

    Cash ISAs

    Saving into a tax-free ISA also offers useful tax-related benefits. When you save using an ISA, any interest, growth, or returns you make are all completely tax free. You can save up to £20,000 a year in a cash ISA and enjoy the tax-free returns.

    Split your assets

    If you are married or in a civil partnership where one person is a low earner or doesn’t work, you should think about the allocation of your assets. Transferring assets to the lower earner can reduce your Capital Gains Tax bill by 18% or 28%. On top of this, as any income from the asset will be taxed at a lower rate, giving you more of a tax saving.

    Use Charitable Donations

    An option that benefits everyone. When you donate to charity, you can claim tax relief on your tax return and the charity can claim an extra 25% as Gift Aid too.

    As a higher rate (40%) taxpayer, if you donate £100 to charity the charity will get £125 and you can claim £25 back on your tax return too. So, the £125 donation has only cost you £75 in total.

    If you are a Higher Rate taxpayer looking for financial planning advice speak to the experts at The Bateman Group today.

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