Tax efficient financial planning for higher earners – a short guide
Being a high earner should be every young person’s dream. Since the budget in October 2024, however, many are asking whether putting in the work to become a high earner is worth it. The tax burden is pretty unpleasant. To start with, you’ll lose your personal allowance of £12,750 once you earn above £125,140. That’s why we have published this concise guide to tax efficient financial planning for higher earners.
Some may say that earning well and paying a fair chunk in tax is a nice problem to have. But seeing those large HMRC deductions on your payslip can be hard to take, especially when your employer demands their pound of flesh from you week in and week out.
What you will learn
- Understand the tapered personal allowance affects high earners’ tax burdens
- How ISAs provide tax-efficient growth and withdrawal opportunities
- The ways pensions can reduce taxable income while building retirement savings.
- The potential tax benefits of setting up a limited company for self-employed high earners
- Insight into the risks and rewards of Venture Capital Trusts (VCTs)
The importance of tax efficiency for high earners
Tax rules change, but one thing stays the same – higher earners pay more. Without careful planning, a big chunk of income disappears unnecessarily.
Here are a few tips:
- Making full use of tax-free allowances keeps more money working for you.
- Pensions offer relief at the highest rate and grow tax-free.
- ISAs shield investments from capital gains and income tax.
- Salary sacrifice can lower taxable income while boosting long-term savings.
- Thoughtful structuring of earnings, dividends, and bonuses avoids unnecessary tax bills.
A tax-efficient approach means more control over wealth. As a result, this can lead to better investment growth and a smoother path to financial security.
Financial planning for higher earners – investment options
If you’re a high earner, keen to invest wisely, protect your money and minimise taxes, here are a handful of options, ideally suited to these requirements. In addition to covering some of the best tax-efficient investments for higher earners, we cover how setting up and paying yourself via a limited company is the best foot forward for business owners.
ISAs
Everyone loves an ISA. You contribute money, it grows (hopefully), and when you withdraw, you’re not taxed. You have a choice between Cash and Stocks and Shares ISAs and if you haven’t got a lump sum to invest, you can invest on a regular monthly basis. Nothing to dislike here apart from the fact that the ISA limit of £20,000 is a little low – the ISA allowance has not increased since April 2017.
Pensions
Unlike ISAs, not everyone loves a pension, but they are incredibly good at reducing tax. Pensions have a strange image, but like ISAs, everyone has an annual allowance, i.e. how much they can contribute to a pension and receive tax relief. Contributions can be made of up to 100% of yearly earnings up to the annual allowance of £60,000 per year, whichever is lower. Once your adjusted income goes over £260,000 per year however, the maximum amounts you’re able to contribute to a pension taper away. Any unused annual allowance may be carried forward from the previous three tax years in certain cases.
Limited company for the self-employed
If you are a self-employed sole trader and a high earner, you could consider setting up a limited company to reduce tax but do check the pros and cons first with an accountant.
Your income would be paid to the limited company, and you could receive a salary and / or dividends. The income levels taken from the limited company would be under your control and clever management could help you reduce your tax burden.
Do factor in the additional cost of an accountant and annual audited accounts. The financial information of your limited company would be visible to the public and you’d need to be profitable to take dividends.
Venture Capital Trusts (VCTs)
For the experienced high-net-worth investor who may have maxed out on pension and ISA contributions, VCTs allow you to invest in small, fledgling businesses. For higher earners, these are some of the most tax-efficient investments.
As an incentive for doing so, you’d receive up to 30% tax relief on your investment. If you held onto those shares for five years, any profit you made would be tax-free. Small fledgling businesses have great growth potential but also come with considerable risk.
As a result, we always recommend speaking to an independent financial adviser before investing.
The role of financial planning in achieving early retirement
Retiring early isn’t just about saving more. For many people, it’s about saving smart, and tax efficiency plays a huge role in making that happen for higher earners.
Here are a few areas to help you towards a financially free, early retirement. If you’re looking to retire early, consider the following:
- Maximising pension contributions lowers tax bills today and builds long-term security.
- ISAs allow tax-free withdrawals, keeping income flexible in retirement.
- Investing in tax-efficient assets reduces unnecessary losses to HMRC.
- Careful withdrawal planning avoids hitting higher tax bands.
- Using allowances wisely means getting the most out of every pound.
With the right plan, financial independence can come much sooner than expected.
Estate & inheritance tax planning for wealthy individuals
Without proper financial planning, a large portion of wealth could end up in the hands of HMRC instead of loved ones. Over time, higher earner will likely exceed the IHT threshold.
Here are a handful of ways to lower, or avoid IHT entirely:
- Gifting money during your lifetime can reduce inheritance tax (IHT).
- Trusts help control how assets are passed down.
- Business Relief and AIM shares offer tax-efficient ways to preserve wealth.
- Pensions sit outside an estate, making them a useful tool for IHT planning.
- The residence nil-rate band can reduce tax on property inheritance.
Sterling the inheritance tax planning process now, could help you later down the line. For example, little-known loopholes like the seven-year rule for inheritance tax, could be invaluable for you and you beneficiaries.
Working with a financial planner – what to expect
High earners face complex tax rules, investment choices, and retirement strategies. A financial planner helps cut through the noise.
Here is what to expect from working with a financial planner:
- A detailed review ensures no tax-saving opportunities are missed.
- Investments are structured to maximize returns while staying tax-efficient.
- Pension strategies align with long-term goals and annual allowances.
- Income is optimized to keep tax bills as low as possible.
- Estate planning ensures wealth is passed on in the most efficient way.
A well-structured financial plan isn’t just about growth—it’s about keeping more of what’s earned.
Factors to consider
- How much flexibility do you need in your savings and investments?
- Are you using your full pension and ISA allowances to reduce taxes?
- Could managing income through a limited company benefit your overall tax position?
- Are you comfortable with the high-risk nature of VCTs, or would you prefer a more conservative investment strategy?
- How does your long-term financial plan align with these tools and strategies?
Financial planning for higher earners – quick summary
As you will now know, there are plenty of financial planning opportunities for higher earners. For those with an eye on retirement, pensions offer an effective way to invest tax efficiently.
On the other hand, VCTs are an option for those who like a little risk and are keen to reduce their income tax. If you’re self-employed, setting up a limited company could well be a way to reduce taxes.
We hope you’ve enjoyed this guide to financial planning for higher earners and are now armed with the facts to help you make considered choices going forward.
Frequently Asked Questions (FAQs)
Keen to learn more about financial planning for high earners? Read through our FAQs to boost your knowledge of this important topic.
What is tax-efficient financial planning for higher earners?
Tax-efficient financial planning for higher earners involves structuring income, savings, and investments to reduce taxes while maximising the potential for long-term wealth. High earners often face additional tax burdens, such as the loss of their personal allowance or higher dividend tax rates. Strategies like increasing pension contributions, paying into an ISA, and investing in tax-efficient vehicles such as Venture Capital Trusts (VCTs) can help reduce taxes. By working with a financial planner, high earners can build a strategy and financial plan, tailored to their income, goals, and risk tolerance.
How can I reduce my tax bill as a high earner?
High-income earners can lower taxes through a considered planning process. Key strategies include maximising pension contributions to benefit from tax relief, using ISAs for tax-free growth, and making charitable donations to reduce taxable income. Business owners may also benefit from tax-efficient salary and dividend structures. A financial planner can help tailor a plan for your specific financial situation.
Why do higher earners need specialised financial planning?
Higher earners face unique financial challenges. This includes losing their personal allowance once income exceeds a certain amount, being subject to higher tax rates, and needing to manage complex investment portfolios. Specialised financial planning for high earners ensures they take advantage of tax-efficient investment opportunities, and pension allowances. Without expert guidance, high earners may find themselves overpaying on taxes or missing out on wealth-building opportunities.
What are the most tax-efficient investments for people with money?
High earners and those with investible assets can benefit from several tax-efficient investment options, including:
- ISAs: Tax-free growth and withdrawals.
- Pensions: Tax relief on contributions.
- Venture Capital Trusts (VCTs) & Enterprise Investment Schemes (EIS): Significant tax benefits.
- Offshore bonds: Deferred tax advantages.
Choosing the right investment depends on factors such as risk tolerance, investment horizon, and overall tax strategy. Always consult a financial adviser before making any decisions.
How does pension planning help reduce taxes for higher-rate taxpayers?
Pension contributions offer one of the most effective tax-saving opportunities for higher-rate and additional-rate taxpayers. Pension contributions receive tax relief at your highest marginal rate, meaning a £10,000 contribution could cost just £6,000 for a 40% taxpayer. Additionally, pensions grow tax-free, and well-planned withdrawals in retirement can reduce taxes over the long term. Nevertheless, high earners need to be mindful of the annual and lifetime allowance limits to avoid unnecessary tax charges.
What is the tapered annual allowance, and how does it impact high earners?
The tapered annual allowance reduces the amount high earners can contribute to pensions tax-efficiently. If your adjusted income exceeds £240,000, your pension annual allowance gradually reduces from £40,000 to as low as £4,000. This means that exceeding your limit could result in tax penalties. Financial planning helps mitigate this by optimising contributions and exploring alternative tax-efficient savings options.
What are the most common tax pitfalls wealthy people should avoid?
Common tax mistakes for high earners include:
- Failing to make pension contributions before hitting the tapered annual allowance.
- Not utilising ISAs, which provide tax-free growth and withdrawals.
- Ignoring capital gains tax allowances leads to unnecessary tax bills.
- Overlooking inheritance tax (IHT) planning can reduce the wealth passed to beneficiaries.
By addressing these pitfalls with proactive planning, high earners can protect and grow their wealth more efficiently.
How can high-income earners minimise inheritance tax (IHT)?
Over time, high earners are likely to build up substantial assets. As a result, they should plan for inheritance tax (IHT) early. Strategies to reduce IHT include gifting assets during your lifetime, setting up trusts, utilising Business Relief-eligible investments, and making use of the nil-rate band and residence nil-rate band. Pensions used to play a key role in estate planning, as they were always outside of your taxable estate for IHT purposes. Working with a financial adviser ensures you structure your wealth efficiently for future generations.
Should high earners prioritise paying off a mortgage or investing?
The decision between paying off a mortgage or investing depends on factors like mortgage interest rates, investment returns, and tax efficiency. If your mortgage rate is low, investing excess cash into tax-efficient accounts like ISAs and pensions could provide better long-term growth. However, reducing mortgage debt can offer peace of mind and financial security. A balanced approach, considering risk tolerance, tax benefits, and long-term goals.
How do financial planners help with tax planning?
Some financial planners specialise in tax-efficient planning for high earners. They would likely follow a process including:
- Assessing your income structure
- Where you hold investments
- Future life and financial goals
They help identify tax-saving opportunities, such as maximising pension relief, utilising ISAs, and structuring business income efficiently. Conscientious, financial planners also ensure that clients avoid tax pitfalls, remain compliant with changing tax laws, and build a wealth strategy that reduces your tax exposure. For high earners, professional financial advice can significantly enhance long-term financial security.
