- The higher-rate tax threshold has been frozen since April 2021 – and this will last until April 2028.
- The Office for Budget Responsibility says it’ll create another 2.1 million higher-rate taxpayers – that’s 47% more.
- The threshold at which you start to lose your personal allowance is £100,000. This hasn’t moved since it was introduced in April 2010.
- Your personal allowance is cut by £1 for every £2 that your net adjusted income is above £100,000 – until your allowance is zero once you earn £125,140. This is an effective tax rate of 60%.
Over two million more people are likely to be higher-rate taxpayers by 2028 – thanks to the freezing of the higher rate tax threshold. This not only raises the rate of income tax you pay – but it hikes the tax on capital gains and dividends, and slashes your personal savings allowance.
If you cross the threshold of £100,000, you’ll be hit even harder with an effective tax rate of 60% – and that particular threshold has been frozen for well over a decade.
If you’re a higher-rate taxpayer, it feels like there are tax attacks on all sides. But there is some hope. Here are 11 end-of-tax year strategies that can cut your tax bill significantly.
This article isn’t personal advice. Tax rules can change, and any benefits depend on your circumstances. If you’re not sure what’s right for you, seek advice. If you live in Scotland, different tax rates and bands will apply. Unlike the security offered by cash, investments can fall as well as rise in value so you could get back less than you invest.
11 tax saving tips for higher-rate taxpayers
1. Pay into a pension
Higher-rate taxpayers benefit from tax relief at their highest marginal rate, so you stand to get a 40% boost on your contributions.
However, it doesn’t necessarily stop there. It also has the benefit of reducing your net adjusted income. If you’re a parent earning over £50,000, cutting back towards £50,000 means you can reduce your high-income child benefit tax charge.
Remember money in a pension can’t normally be accessed until 55 (57 from 2028).
2. Use pensions to deal with the £100,000 threshold
If someone earning over £100,000 pays into their pension, and cuts their adjusted net income, it means they get back some of their personal allowance. So for every £2 their income falls, they’ll get £1 of their allowance back.
It means less of their income is subject to tax at an eye-watering 60%. Plus, if a parent can bring their income back under £100,000, they could also keep their eligibility for tax-free childcare.
3. Check if you can use salary sacrifice
If your employer offers a salary sacrifice scheme, you get even more of a benefit. That’s because you don’t pay National Insurance on sums you sacrifice into your pension either.
4. Carry forward unused allowance
Most people can pay up to £40,000 into their pension this year, and up to £60,000 next year. It’s also possible to carry forward unused allowances from the previous three tax years.
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5. Make use of your capital gains tax allowance before you lose it
Higher-rate taxpayers pay 20% on capital gains on investments and 28% on gains from property. In the current tax year, you can make gains of £12,300 before you pay tax on them, whereas from 6 April 2023 this drops to £6,000.
If you have investments outside an ISA, it’s worth considering taking advantage of your allowance in every tax year. You can use our share exchange service to move these assets into an ISA.
6. Shelter as much of your income-paying assets in ISAs as possible
Higher-rate taxpayers pay tax on dividends at 33.75%. In the current tax year, they have an allowance of £2,000. But that drops to £1,000 in the next tax year.
If you use the share exchange process to shelter income-producing shares in an ISA, you won’t pay tax on these dividends. Because the dividend tax rate is higher than the capital gains tax rate, it’s often worth prioritising this when deciding how to use your ISA allowance.
7. Consider your Cash ISA
Higher-rate taxpayers have a £500 personal savings allowance. But now that the most competitive fixed rates have pushed as high as 4.5%, it means any higher-rate taxpayer with savings of over £11,000 could face tax at 40% on some of their interest.
You need to factor in the fact that Cash ISA rates tend to be slightly lower than their savings accounts equivalents. However, those with large cash holdings, especially those who are nearing the additional-rate tax threshold, at which point the personal savings allowance is lost, might want to consider a Cash ISA.
8. Plan as a couple
If you’re married or in a civil partnership and your partner pays a lower rate of tax, you can transfer income-producing assets into their name. That way you can both take advantage of your allowances, and then the rest is taxed at their marginal rate rather than yours.
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9. Consider your tax position next year
This is particularly key if you’re expecting to become a basic-rate taxpayer – which often happens in retirement.
Usually in this position, people will consider delaying receiving income or capital gains so they pay a lower rate on them. However, this year the falling capital gains tax and dividend tax allowances will mean you’ll need to calculate whether this is still worthwhile.
10. Make a charitable donation
This will cut your tax bill – although clearly won’t leave you better off overall financially. The charity will receive 20% in gift aid, and you can claim back the other 20% through your tax return.
11. Offset any losses
Don’t forget, you can offset any capital losses you make during the tax year against gains. If your total taxable gain is still over the tax-free allowance, you might be able to deduct any unused losses from previous tax years.
If just some of your losses reduce your gain to below the tax-free allowance, you can carry forward the remaining losses to a future tax year.