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As 2019 came to a close, many higher earners may have been disappointed to hear Boris Johnson retract his proposal to raise the Higher Rate threshold from £50,000 in 2019-20 to £80,000 in 2020. Whilst this idea appears to have possibly been “shelved for the future”, the good news for higher earners is that there are still many sensible routes open to you for reducing unnecessary exposure to the Higher Rate.
Here at Cedar House, we help clients across the country to optimise their wealth and finances to meet their long term financial goals. In this short guide, we’ll be sharing 6 ideas on Higher Rate mitigation which we hope you find helpful. If you’d like to discuss your own financial plan with us, you can arrange a free (no-obligation) financial consultation via:
020 8366 4400
#1 Get an ISA
Not got an individual savings account (ISA) yet? Consider opening one. In 2019-20, you are allowed to save up to £20,000 using these “wrappers”, and any interest or income (e.g. dividends) you earn from these savings/investments will be tax-free. If you contributed the maximum amount every year for ten years, for instance, assuming the ISA rules stayed the same you could save £200,000 in a tax-efficient shelter.
If you have savings which exceed £20,000 in a given tax year, bear in mind that you can accrue up to £1,000 in interest, tax-free, under your personal savings allowance (PSA). This PSA covers the interest from any regular savings accounts, peer-to-peer lending or credit unions.
#2 Use the dividend allowance
Do you receive any income from shares, or are you considering this as another income stream? This can be a great way to increase your earnings whilst reducing your exposure to the income tax Higher Rate. In 2019-20, you can receive up to £2,000 per tax year from dividends tax-free, under your annual dividend allowance.
It’s also worth noting that taxes on dividends are lower compared to taxes on your salary. For some company directors, therefore, it can be worth speaking to a financial adviser about the possibility of lowering your salary and increasing your dividend income. You need to be careful, however, as this can come with important consequences (e.g. when applying for a mortgage).
#3 Marriage allowance
This doesn’t add up to huge tax savings in 2019-20, but it’s worth taking note just in case. If you are married (or in a civil partnership) and you were both born after 6 April 1935, you might be able to take advantage of the Marriage Allowance. This allows one spouse earning under £12,500 per year to transfer up to £1,250 of their personal allowance to their other half, who earns more. Some couples could save up to £250 a year using this allowance, which could be worth a few hours of your attention.
#4 Offset expenses
Are you a higher earner who is self-employed or a private landlord? If so, remember you are allowed to claim business expenses against your income from these sources before it is taxed. It can result in significant savings to keep an accurate record of these expenses, and to claim for everything you reasonably can.
Private landlords, for instance, can claim for things such as legal fees, maintenance and repairs, gardeners, advertising (for new tenants) and agent fees. Self-employed people can claim for expenses such as IT equipment, running costs for a home office, phone calls and travel costs to meet customers and clients.
#5 Pension contributions
Under UK auto enrolment rules, in 2019-20 your employer is required to pay at least 3% of your annual salary into your workplace pension. You also must put aside at least 5%. The great thing about pension contributions is that they receive tax relief at your highest rate of income tax. So, if you’re a Higher Rate taxpayer the 40% tax you would have paid on your contribution is, instead, put straight into your pension pot.
Basic Rate taxpayers get tax relief at 20%, so it’s important to speak with your financial adviser about how to make the most out of your tax position as a higher earner. Remember, how you get the tax relief will depend on your individual circumstances. Workplace pensions, for instance, will usually require your employer to deduct your contribution before you pay tax. If you put money towards a private pension, however, your scheme might have to request the tax relief from the government after you’ve made your contribution.
#6 Cease unnecessary national insurance contributions (NICs)
Most of us will be required to pay NICs throughout our working lives. Once you reach your state pension age, however, you are no longer required to make Class 1 and Class 2 contributions. If you choose to keep working past your state pension age, make sure your employer stops taking these contributions from your wage. You might need to write to HMRC for proof that you have finally reached your state pension age.
Be careful to consider getting financial advice, however, if you have not yet built up 35 years of qualifying NICs, as this is a requirement to gain the full new state pension in 2019-20. If you are short, it might be worth continuing voluntary NICs if you choose to keep working past your state pension age in order to make up gaps in your record.
If you would like to discuss your financial plan with a member of our team, then get in touch today to arrange a free consultation: 020 8366 4400 or email@example.com.