The top 10% of earners pay 59% of all income tax, analysis of government figures from Hargreaves Lansdown shows.
Meanwhile the top 25% of taxpayers will pay 76% of all income tax this year.
Sarah Coles, head of personal finance, Hargreaves Lansdown, said: “Higher earners are always going to be in the frame for more tax.
“They earn more, have the broadest shoulders, and will carry most of the burden. However, the level of tax they face has ramped up significantly, and thanks to frozen tax thresholds, it applies to many of those who don’t consider themselves to be super-rich. It means it’s worth getting to grips with tax hacks for higher earners.”
If you earn £47,400 that puts you in the 25% of income taxpayers, while if you earn over £71,600 you’re in the top 10%.
The portion of their income that falls between £100,000 and £125,140 is taxed particularly heavily. For every £2 you earn over £100,000 you lose £1 of your personal allowance.
By the time you earn £125,140 you’ve lost the lot, so on that chunk of your salary you effectively pay 60% tax.
If you have children, it’s even tougher, because at £100,000 you lose government support for childcare. Once you’ve breached £125,140 you pay 45% on the extra.
Hargreaves Lansdown provided the following ‘tax hacks’ for higher earners:
- Check if your employer operates a salary sacrifice scheme, where you give up a portion of your salary, and spend it on certain things free of tax – including pensions. This will reduce the amount of income you pay higher tax rates on. It may also bring you down below tax thresholds – including the £100,000 cliff edge. See if you can use the scheme for any bonus too.
- If you don’t have access to salary sacrifice, you can still pay into a SIPP and receive tax relief at your highest marginal rate.
- You can carry forward any unused annual pensions allowance from the previous three tax years – as long as it doesn’t add up to more than your income this year.
- If you’re making income from savings interest, use a cash ISA to protect as much as possible from tax.
- Take advantage of stocks and shares ISA allowances – where your investments are protected from dividend tax and capital gains tax.
- Don’t hang about when using your allowances. There are rumours the cash ISA allowance could be cut, and while this is still only a rumour, and any potential cuts wouldn’t necessarily come in the current tax year, you may want to act while you know where you stand.
- If you already have investments outside an ISA, you can move them inside using this year’s allowance – through the Bed & ISA process.
- If you have investments outside an ISA and have already used your allowance for this tax year, you should consider realising up to £3,000 of gains, so you take advantage of this year’s CGT allowance.
- Plan as a couple. If you’re married or in a civil partnership and your partner pays a lower rate of tax, you can transfer income-producing assets into their name, so you both take advantage of your ISAs and tax allowances, and then the rest is taxed at their marginal rate rather than yours.
- Don’t forget your children. In the current tax year, you can save or invest £9,000 in a Junior ISA for any qualifying child, and all interest, dividends or capital gains are tax free.
- Consider whether a Venture Capital Trust or Enterprise Investment Scheme meet your needs. These aren’t right for everyone, because they are very high risk so should only be considered as a small part of a large and diverse portfolio. However, if you use these schemes, you can get 30% income tax relief on the amount you invest – which will reduce your overall tax bill.”
- If you’ll earn less in future, consider deferring income. If there’s a time when you expect to be paying a lower rate of tax, consider whether you can take income then rather than now. You can, for example, use fixed term savings that pay interest annually, instead of easy access paying more frequently. This often makes sense just before retirement.”
