If you earn over £100,000, you could be caught in a ‘tax trap’, where your earnings over £100,000 are effectively taxed at a top rate of 60% (61.5% in Scotland, increasing to 63% in April 2024). In addition, you lose £1 of personal allowance for every £2 over £100,000 earned up to £125,140.
To protect your wealth and reduce your tax liability by effectively reducing your salary, you can take advantage of several savings and allowances.
Pensions Annual Allowance
The Annual Allowance is the limit on how much you can build in tax-efficient pension benefits in each tax year. For most, this Annual Allowance is £60,000 for the 2023/24 tax year, having been increased from £40,000 the year before.
By making use of your full annual allowance (£60,000), you can reduce your overall adjusted income (total income minus pension contributions) so that it sits below £100,000, not only receiving tax relief on the contribution but also reinstating your personal allowance.
Capital Gains Tax
In this tax year (2023/24), the capital gains tax (CGT) allowance was reduced to £6,000 and will be halved again in the 2024/25 tax year to £3,000 per person. Any capital gains in excess of this allowance are charged at 10% or 20% (or 18% and 28% for residential property disposals) depending on your tax position.
If you own a trading business, you may be entitled to Business Asset Disposal Relief (BADR) (previously Entrepreneurs Relief) whereby you can reduce your rate of CGT to 10%, up to a lifetime limit of £1 million worth of capital gains. The rules are complex, and most planning needs to be in place two years before disposal so you must talk to your adviser before making any disposals.
If you are considering investing in someone else’s business, it is important to find out if the shares will qualify for Investors Relief (IR) when you dispose of them. IR is similar to BADR offering a reduced 10% CGT rate on gains up to a lifetime limit of £10 million.
Tax-free dividend allowance
In addition to the CGT allowance, investors are also entitled to a tax-free dividend allowance of £1,000 per annum (dropping to £500 from the 2024/25 tax year) for dividend income received through ownership of shares. Dividends received above this level are taxed at 8.75% for a basic rate taxpayer, 33.75% for a higher rate taxpayer, and 39.35% overall for an additional rate taxpayer.
It is important to be aware of the allowances available to you, making use of these wherever possible to reduce your and your family’s overall tax liability.
Transfer of assets
If you pay a higher rate of tax than your spouse, you may consider making use of ‘spousal exemption’ whereby you can transfer private company shares to your spouse free of any tax in order to make use of their tax allowances and lower rates of tax.
It is important however to seek advice before making these transfers to ensure it is suitable for you. Alternatively, you can ask your adviser for ways to make your income more tax-efficient.
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As we approach the end of the 2023/24 tax year, if you feel you need support with your tax planning, please do get in touch, we would be delighted to help.
