What is tax planning?
Tax planning means taking proactive steps to reduce your tax bill, by making smart financial decisions. This includes everything from savvy saving and investing, to using salary sacrifice schemes to reduce monthly take home pay, thus reducing the amount of tax paid.
Effective tax planning is usually undertaken with the help of a qualified expert, such as a specialist UK tax adviser or financial adviser.
Tax treatment depends on your individual circumstances and may be subject to change in the future.
What is a higher rate taxpayer?
Higher rate taxpayers in England and Wales pay 40% income tax on anything they earn over £50,271, even more if they’re an additional rate taxpayer earning over £125,140 a year.
Taxpayers in Scotland can benefit from many of the same tax planning approaches as those in the UK, although their tax bands are different.
Higher rate taxpayers in Scotland pay 42% income tax on anything they earn between £43,663 to £75,000. They pay 45% between £75,001 and 125,140, and 48% tax on anything they earn over £125,140.
If you fall into any of these higher taxpaying groups, tax planning can be particularly important, helping you to take a step back and identify areas where you could be paying less tax, save more and plan for the future.
Depending on your circumstances, a financial adviser may recommend one or more of the tax planning approaches below.
Maximise your pension contributions
Investing in a pension is one of the most tax efficient ways to save money and provide for your retirement.
You can put 100% of your earnings into a pension, and as a higher rate taxpayer, you’ll be eligible to claim an additional 20% tax relief. This is on top of the basic 20% tax relief claimed by your pension provider, making a total saving of 40%. This applies to workplace and personal pensions, but you must remember to claim additional tax relief via your self-assessment tax form.
For those who are employed, when you increase your pension contributions, your employer will generally increase theirs too. Your pension policy documents will provide further details on this.
Investing in a pension can be a great way to save on tax, but bear in mind that any money you pay into a pension will not be available to access until you reach retirement age. This is currently set at age 55 but will increase to age 57 from 6 April 2028.
A qualified financial adviser will be able to discuss the best course of action based on your circumstances.
Consider investing in an ISA
Unlike traditional savings accounts, a standard ISA allows you to save up to £20,000 tax free each tax year.
There are various types of ISA, depending on your individual needs:
- Cash ISA – Earns tax free interest on your savings. The more you save into a Cash ISA, the more tax you save on your hard-earned cash.
- Stocks and shares ISA – Unlike a Cash ISA, a Stocks and Shares ISA aims to generate returns through dividends and capital appreciation. Historically, stocks and shares ISAs have consistently outperformed cash savings, but investing does carry a greater risk.
Bear in mind the value of investments can go down as well as up. You could get back less than you invest.
- Lifetime ISA (LISA)– Used to save for your first home or for your retirement, with a 25% government bonus on savings of up to £4,000 per tax year. A Lifetime ISA must be opened by the age of 40, but you can continue to add funds to it until you’re 50.
- Junior ISA (JISA)– Allows parents or guardians to save up to £9,000 per tax year for their child’s future. This ISA cannot be accessed by the child until they turn 18.
As of 6th April 2024, you are now able to pay into more than one of each ISA type per year (excluding LISAs and JISAs). The maximum amount invested will remain at £20,000.
Use your dividend allowance
If you own shares in a company, it’s likely (if the company does well), that you’ll receive a dividend payment.
While any dividends received are taxable, you will receive a dividend tax allowance each year. The allowance for 2024/2025 is £500, meaning you’ll only pay tax on anything you earn from dividends above that amount.
The dividend allowance is the same for everyone, regardless of any other types of income you receive. It cannot be carried over to the following year.
Use your capital gains allowance
If you make a financial gain from selling an additional property or other asset worth more than £3,000 (excluding your vehicle), you’ll need to pay capital gains tax.
Everyone receives a capital gains tax allowance, although this amount has sharply decreased in recent years. For the 2024/2025 tax year, you will need to pay capital gains tax on anything you gain from the sale of an asset over £3,000.
The percentage you pay in capital gains tax differs dependent on the tax band you fall into. For higher rate and additional rate taxpayers, capital gains tax is set at 24% on the sale of additional residential property and other chargeable assets.
For basic rate taxpayers, the rate depends on the size of your gain, your taxable income and what asset has been sold.
If you are selling an additional property that was previously your only home, you may be liable for a reduction in the amount of capital gains tax you pay. However, this is a complicated topic and there is no one size fits all solution, so it’s best to speak to a financial adviser who will be able to explain more.
Consider taking part in salary sacrifice schemes
Salary sacrifice schemes allow employees to purchase a non-cash benefit from their employer, such as extra holiday. In exchange, the employer will reduce the amount of pay the employee receives.
Backed by the Government, salary sacrifice schemes help employers and employees to save on tax because less take home pay means less income to be taxed on.
For example, a taxpayer whose pay puts them just into the next tax bracket could reduce the amount of tax and National Insurance they pay by choosing to sacrifice some of their salary in exchange for a non-cash benefit from their employer.
Just bear in mind that while there are obvious benefits to this, taking part in salary sacrifice will mean you’ll need to declare that you earn less when taking out a new mortgage or loan. This may mean you cannot borrow as much as you would be able to if you were not sacrificing some of your salary.