A high earner’s guide to the end of the tax year

The conclusion of the fiscal year is approaching on 5 April. This is a critical opportunity to save on Income Tax and reduce extra tax liabilities if you are a higher rate taxpayer who earns between £50,271 and £125,140.

With the deadline quickly approaching, it’s important to consider how you might lower your net income below the higher rate level or otherwise decrease your tax burden.

A quick look at higher rate tax bills

As previously stated, if your earnings fall between £50,271 and £125,140, you will be classified as a higher rate taxpayer.

For an individual earning £65,000 per year, here is how Income Tax is broken down:

On £12,570 – Tax-free allowance (0%).

On £37,700 – Basic rate (20% or £7,540)

On the final £14,730 – Higher rate (40% or about £5,890).

In this case, the individual would pay around £13,430 in Income Tax, which is roughly 21% of their entire income.

Clearly, failure to minimise tax liabilities can result in a significant financial burden for higher rate taxpayers, therefore you should prepare to maximise your tax-free allowances.

However, reducing Income Tax Liabilities is not the only reason you should prepare to utilise tax breaks before the end of the fiscal year.

Factoring in dividends and Capital Gains Tax

You must pay more Income Tax if you are a higher-rate taxpayer. However, you may also be taxed at a higher rate on other income (depending on your primary rate of income), such as dividends or gains on asset disposal.

When you sell an asset and make a profit, you may be taxed on the proceeds. Capital Gains Tax is due by higher rate taxpayers beyond the yearly limit of £6,000 at a rate of 20% (or 28% on residential property).

Similarly, dividends above the £1,000 allowed are taxed at a higher rate of 33.75% (against 8.75% at the basic rate).

High Income Child Benefit Charge

The High-Income Child Benefit Charge is a significant challenge for families when one partner is slightly beyond the higher rate threshold.

If you or your partner earns more than £50,000 and claims Child Benefit, you must pay the penalty. If this applies to both of you, the higher earner is liable for covering the cost.

This also applies if someone else’s child lives with you and the parent makes at least an equal contribution to the child’s expenditures.

If you earn more than £50,000, you must contribute 1% of the total Child Benefit received for every £100 earned above that amount.

For taxpayers near or over this level, a slight reduction in taxable or total income might yield in large savings.

Making 2024 a tax efficient year

There are several strategies to efficiently minimise your net income and avoid paying more tax than necessary. You can:

• Make pension contributions – You may contribute up to £60,000 this tax year, more if you have unused allowance from previous years, and making a contribution to a personal pension will result in paying less tax at the higher rate.
• Capital Gains Allowance – If you’re thinking of selling an asset and anticipate to making a profit, you may have to pay tax on any gain on the price you bought for it, you may have to pay tax on any profits that exceed your £6,000 limit, so consider moving sales ahead if you haven’t used it yet or putting them back if you have.
• Giving to charity – You can minimise your taxable income by participating in a Payroll Giving programme, which allows you to contribute to charity straight from your payroll. You can also gift directly to charities and if you make the gift under gift aid you can claim higher rate tax relief of the value of your gift.
• Gifting – Although not explicitly intended to reduce your income tax burden, you can gift up to £3,000 per year without paying Inheritance Tax if you die within seven years of making the gift, making it income tax efficient.
• Venture capital programmes – Purchasing shares in some budding enterprises may qualify you for tax breaks.

These allowances are meant to assist you in reducing your tax liabilities while remaining consistent with legislation and keeping your National Insurance record for State Pension reasons.

Tax efficiency can be a complicated subject for high-earners. If you would like more help ensuring you are both meeting HMRC’s requirements and ensuring that you’re not overpaying, call JW Hinks and speak to our friendly team of tax experts on 0121 456 0190.