Pension contributions
Your pension is the unsung hero for achieving long-term financial security. Pension contributions made by an individual qualify for tax reliefs that boost your savings and reduce tax bills.
For higher rate taxpayers, you can get 40% tax relief on pension contributions:
- When you pay £8,000 in,
- HMRC adds £2,000 to your pension pot, and
- You can reclaim a further £2,000 directly from HMRC
Additional rate taxpayers get the same treatment, and they benefit from 45% total relief, to match the rate of income tax.
Not forgetting:
- If you earn between £100,000 and £125,140 there is an effective rate of 60% tax relief.
- Business owners can save even more by making employer pension contributions instead of taking profits as PAYE of or dividends.
- You might reduce or negate the child benefit tax charge.
- Salary sacrifice would reduce National Insurance too, for employees and employers, but all of the income tax saving goes straight into your pension instead of reducing your tax bill.
The pension fund grows completely tax-free until you retire, when you’ll get a quarter out tax-free. What’s left is subject to income tax when you draw it, but this should be at a basic rate if planned well.
VCT and EIS Investments
VCT (Venture Capital Trusts) and EIS (Enterprise Investment Schemes) are investments in smaller companies. They would typically have high growth potential but can be very risky and illiquid.
VCT and EIS funds are a vital source of funding for start-up companies, or companies that want to grow rapidly and need finance. VCT and EIS providers step in to provide these companies with the money that will allow them to be successful in their projects. Think Dragons Den but on a larger scale.
To promote this type of investment the Government gives you 30% relief on qualifying investments. Put simply, if you invest £100,000 you would be eligible for a £30,000 reduction in your tax bill (if it’s that high). You must hold the VCT for 5 years, and the EIS for 3 years, to keep the tax relief. Both grow tax-free.
These investments can be very risky, and the nature of the underlying companies almost guarantees that some will fail completely, but within a diversified portfolio the effects are reduced. There is loss relief in these circumstances to offer some protection.
Gift Aid and charity donations
For every charitable donation you make you can claim additional relief against your income tax.
- Higher rate taxpayers can reduce their tax bill by £20 for every £80 of cash donated.
- Additional rate taxpayers will reduce their bill by £25 for every £80 of cash donated.
Don’t forget to use gift aid so that the charity can benefit too. This won’t affect your own relief. Keep records for proof.
Comment
Reducing your tax bill as a high earner involves strategic planning and taking advantage of available reliefs and incentives. By making pension contributions, investing in VCT and EIS, and donating to charity with Gift Aid, you can significantly lower your tax liabilities while also planning for a secure financial future. A Financial Planner, aligned with your accountant, can tailor these strategies to your specific circumstances and ensure compliance with current tax laws.
How can we help?
Nathan Richardson is an Investment Director & Chartered Financial Planner in our expert Investment Management team.
For further financial advice concerning your investments or finances, please get in touch with Nathan or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online form.
Contact usPlease note that the value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.