Monetary planning ideas for top earners
In collaboration with Close Brothers Asset Management
High earners face unique challenges when it comes to financial planning. With those in the top tax areas facing high tax rates on both capital gains and dividend income, high earners can potentially face large tax liabilities on their investments.
Fortunately, there are a number of ways that high income individuals in the UK can grow their wealth in a tax efficient manner. Here are some financial planning tips that could help high earners significantly reduce their investment tax liability.
Make the most of your retirement benefits
One of the most effective ways for high earners in the UK to build wealth for tax purposes is to save into a retirement age
One of the most effective ways for high earners in the UK to build wealth for tax purposes is to save into a retirement age. Capital gains and dividend income are tax-free within a pension. In addition, contributions are associated with tax breaks. This is essentially a government reward for saving for retirement.
Tax breaks are paid on your pension contributions at the highest income tax rate you paid. Taxpayers with a higher tax rate receive 40% tax relief, while taxpayers with an additional tax rate receive 45% tax relief. This means that a £ 1,000 pension contribution will only cost you £ 600 if you are in the higher tax bracket. If you are a taxpayer with an additional tax rate, a £ 1,000 contribution is only £ 550.
For 2020/2021, the standard annual pension contribution limit for tax relief purposes is £ 40,000. However, if you are considered a “high income person” and have an “Adjusted Income” of more than £ 240,000 per year and a “Threshold Income” of more than £ 200,000 per year, your annual allowance will be reduced by £ 1 for every £ 2 You above the adjusted income figure.
High earners can potentially contribute more than their rejuvenated annual allowance by taking advantage of the carry over rules. The way carryover rules work is that you are allowed to use an annual allowance that you haven’t used in the previous three tax years as long as you meet certain criteria. Lecture is especially useful when your income varies from year to year. For example, if you are self-employed and your income changes every year, carryover rules can help you bring more into your retirement in a year when your income is higher.
One issue that high earners should consider when it comes to pensions is the Lifetime Allowance (LTA). This is the total amount that you can build on your retirement accounts without paying any additional tax charges. It currently stands at £ 1,073,100. If you exceed the LTA, you pay a tax charge on the deductible when you receive income. withdraw a lump sum from your pension; or reach the age of 75 without having used any benefits. There are several strategies high earners can employ to avoid LTA violations, such as: B. the diversion of retirement assets into the pension of a spouse.
Save and Invest in ISAs
Saving and investing within an ISA is another tax efficient strategy that high earners should consider
Saving and investing within an ISA is another tax efficient strategy that high earners should consider. Like pensions, ISAs allow investments to grow tax-free.
The annual allowances for ISAs today are quite generous. For example, the ISA for stocks has an annual allowance of £ 20,000. This means a couple could potentially save £ 40,000 a year tax free. This money can be accessed at any time.
The Lifetime ISA, which is open to those ages 18 to 40, has a lower annual allowance of just £ 4,000. However, contributions to this ISA are topped up by the government at 25% if you are under the age of 50. So if you invest the full £ 4,000 you get an additional £ 1,000. The disadvantage of this ISA is that it is more restrictive than the ISA on stocks and shares. You cannot access your credit or buy your first property until you are 60.
Consider venture capital programs
High income earners familiar with high investment risk should consider venture capital programs
Finally, high earners familiar with high investment risk may also want to consider venture capital programs. These are investment programs set up by the UK government to encourage early stage investment in small businesses. They offer very generous tax breaks.
One such system is the Enterprise Investment Scheme (EIS). This program is designed to encourage investment in early-stage companies that are not listed on a stock exchange. It offers investors a range of tax breaks, including 30% income tax relief; No capital gains tax (CGT) on gains from the sale of EIS assets provided the assets are held for three years. and CGT deferrals when the proceeds are invested in qualified EIS facilities.
While venture capital programs can help high earners significantly reduce their tax liabilities, it is important to understand that because of the high risk of investing in early-stage companies, they are not suitable for everyone. Only those who can afford to take the risk should consider these investment plans. It is a good idea to get the opinion of a qualified professional before investing.
Partner of a financial advisor
Implementing a tax efficient savings plan is vital because the difference between pre-tax and post-tax investment returns can be significant
Overall, there are many ways for high earners to save and invest in a tax-efficient manner for the future. Implementing a tax efficient savings plan is vital because the difference between pre-tax and post-tax investment returns can be significant.
Financial planning can sometimes be complex due to the different allowances. This is especially true for high earners. If you are unsure about the best way to go about it, consult a qualified financial advisor. A consultant can guide you through the complexities and make sure you are making the most of the various compensation options available.
Venture capital. All tax benefits depend on your personal tax position and the rules are subject to change.
To learn more about how Close Brothers Asset Management can help you with your financial planning needs, visit their website.