Tax efficient financial planning for higher earners – a short guide
Being a high earner should be every young person’s dream. Since the budget in October 2024, however, many are asking whether putting in the work to become a high earner is worth it. The tax burden is pretty unpleasant. To start with, you’ll lose your personal allowance of £12,750 once you earn above £125,140. That’s why we have published this concise guide to tax efficient financial planning for higher earners.
Some may say that earning well and paying a fair chunk in tax is a nice problem to have. But seeing those large HMRC deductions on your payslip can be hard to take, especially when your employer demands their pound of flesh from you week in and week out.
What you will learn
- Understand the tapered personal allowance affects high earners’ tax burdens
- How ISAs provide tax-efficient growth and withdrawal opportunities
- The ways pensions can reduce taxable income while building retirement savings.
- The potential tax benefits of setting up a limited company for self-employed high earners
- Insight into the risks and rewards of Venture Capital Trusts (VCTs)
Financial planning opportunities for higher earners
If you’re a high earner, keen to invest wisely, protect your money and minimise taxes, here are a handful of options, ideally suited to these requirements. In addition to covering some of the best tax efficient investments for higher earners
ISAs
Everyone loves an ISA. You contribute money, it grows (hopefully), and when you withdraw, you’re not taxed. You have a choice between Cash and Stocks and Shares ISAs and if you haven’t got a lump sum to invest, you can invest on a regular monthly basis. Nothing to dislike here apart from the fact that the ISA limit of £20,000 is a little low – the ISA allowance has not increased since April 2017.
Pensions
Unlike ISAs, not everyone loves a pension, but they are incredibly good at reducing tax. Pensions have a strange image, but like ISAs, everyone has an annual allowance, i.e. how much they can contribute to a pension and receive tax relief. Contributions can be made of up to 100% of yearly earnings up to the annual allowance of £60,000 per year, whichever is lower. Once your adjusted income goes over £260,000 per year however, the maximum amounts you’re able to contribute to a pension taper away. Any unused annual allowance may be carried forward from the previous three tax years in certain cases.
Limited company for the self-employed
If you are a self-employed sole trader and a high earner, you could consider setting up a limited company to reduce tax but do check the pros and cons first with an accountant.
Your income would be paid to the limited company, and you could receive a salary and / or dividends. The income levels taken from the limited company would be under your control and clever management could help you reduce your tax burden.
Do factor in the additional cost of an accountant and annual audited accounts. The financial information of your limited company would be visible to the public and you’d need to be profitable to take dividends.
Venture Capital Trusts (VCTs)
For the experienced high-net-worth investor who may have maxed out on pension and ISA contributions, VCTs allow you to invest in small, fledgling businesses. For higher earners, these are some of the most tax-efficient investments.
As an incentive for doing so, you’d receive up to 30% tax relief on your investment. If you held onto those shares for five years, any profit you made would be tax-free. Small fledgling businesses have great growth potential but also come with considerable risk.
As a result, we always recommend speaking to an independent financial adviser before investing.
Factors to consider
- How much flexibility do you need in your savings and investments?
- Are you using your full pension and ISA allowances to reduce taxes?
- Could managing income through a limited company benefit your overall tax position?
- Are you comfortable with the high-risk nature of VCTs, or would you prefer a more conservative investment strategy?
- How does your long-term financial plan align with these tools and strategies?
Financial planning for higher earners – quick summary
As you will now know, there are plenty of financial planning opportunities for higher earners. For those with an eye on retirement, pensions offer an effective way to invest tax efficiently.
On the other hand, VCTs are an option for those who like a little risk and are keen to reduce their income tax. If you’re self-employed, setting up a limited company could well be a way to reduce taxes.
We hope you’ve enjoyed this guide to financial planning for higher earners and are now armed with the facts to help you make considered choices going forward.
