Tax Planning

The consequences of being a high earner and the 60% tax trap

By London & Capital | 19 Feb, 2024

Over the last five years, the relentless inflationary pressures and frozen tax brackets have led to a notable increase in the number of people crossing the threshold into the £100,000 income bracket, sparking discussions on the need for strategic financial planning.

What do I need to consider?

  • The 60% tax trap – In 2009, Alistair Darling introduced the personal allowance taper. Individuals earning over £100,000 would lose £1 of their allowance for every £2 earned. Currently the personal allowance stands at £12,570, so anyone earning more than £125,140 will have lost their entire allowance. This phaseout results in an effective tax rate of 60%.
  • Tax Filing Requirement – In the past the tax filing requirement for salaried employees (with no other income) was set at £100,000. This has been increased to £150,000 so be aware that if you are in this bracket, you may be required to file a tax return.
  • Reduced additional tax rate bracket – The additional rate of tax (45% rate) has been adjusted downwards of the 45% income tax bracket. This alteration is a response to the changing economic dynamics and aims to balance the burden of taxation across different income levels.

How to avoid the trap?

  • Strategic SIPP Contributions – Savvy investors can explore opportunities within Self-Invested Personal Pensions (SIPPs) by strategically contributing and carrying back contributions. This approach not only aids in tax planning but also allows individuals to optimize their pension savings.
  • Leveraging Charitable Contributions – Charitable contributions provide a dual benefit of supporting worthy causes while offering tax relief. Individuals can explore this avenue as a means of reducing their tax liability while making a positive impact on society.
  • Tax Reduction through EIS and VCT Investments – For investors, particularly non-Americans, the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) offer tax-efficient investment opportunities. These initiatives stimulate economic growth and provide tax incentives for those willing to invest in entrepreneurial ventures.
  • Gifting Income-Producing Assets – Couples with disparate income levels can consider gifting income-producing assets between spouses to balance their tax liability. This strategic approach helps in optimizing tax allowances and ensuring efficient use of available resources.

In the midst of a frozen tax rate and surging inflation, individuals and investors must navigate the financial landscape with acumen. Understanding the implications of income tax adjustments and exploring strategic financial opportunities can empower individuals to mitigate tax burdens.

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