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Tax efficient investment for high earners in the UK – are you getting it right?

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As a new tax year approaches, with thousands of Brits due to be impacted by the reduction in the additional rate income tax threshold, latest research from Barclays Wealth reveals that 30 per cent of those earning over £50,000 do not know their current tax bracket.

The Autumn Statement in November 2022 delivered a number of changes impacting UK taxpayers, including extending the freeze on tax thresholds for basic and higher rate income tax until April 2028, and lowering the additional rate threshold (ART) from £150,000 to £125,140.

However, the research also showed that 31 per cent of those with an income of £125,140 and over – some of whom will be paying the additional rate for the first time – are also unaware of their current tax bracket.

Confusion around the upcoming tax changes

The UK-wide study of over 3,000 individuals earning upwards of £50,000, reveals disparities in understanding when it comes to tax planning. Despite 65 per cent of respondents saying they feel confident in their understanding of income tax, a third (33 per cent) of those earning between £100,000 and £125,140 do not know what the personal allowance taper is. Furthermore, over a quarter (27 per cent) of those earning over £100,000 are unaware that HMRC requires them to complete a self-assessment tax return.

The research highlights the persisting confusion around tax changes, with two in five (42 per cent) of those who will be in the 45 per cent bracket from 6 April are unaware of the lowering of the threshold announced in the Autumn Budget.


Millions risk paying more tax than they need to

Many people are failing to take advantage of the tax allowances available to them each tax year, with 74 per cent unaware of the advantages of utilising the full personal allowance, 75 per cent of using their ISA allowance and 75 per cent of increasing their workplace pension contributions.

In preparation for the new tax year, many are now considering taking professional financial advice. While almost six in ten (57 per cent) of those with an income of over £50,000 do not currently use a financial adviser, 50 per cent of this group say they plan to do so now in preparation for higher tax bills, 12 per cent for the first time.

Clare Francis, Director of Savings and Investments at Barclays Wealth, said: “Millions of people will see their tax bills rise from next month, putting further pressure on households at a time when money is already tight for many. However, while tax may seem complex, there are a number of simple steps you can take to ensure you make use of the allowances available to each of us every year, which can help reduce the tax you pay. Things like using your ISA allowance and increasing your pension contributions can all help and over time, make a significant difference to the tax you pay.”

Barclays Wealth has the following tips to help minimise the impact of upcoming tax changes:

Use your ISA allowance – The benefit of ISAs is any returns you make are tax free, and you can put up to £20,000 into an ISA this tax year. You’ll have a new £20,000 ISA allowance when the 2023/2024 tax year starts on 6 April, and it’s worth getting into the habit of using as much of your allowance as you can each year.

Be aware of capital gains tax – If you invest outside of an ISA, you may have capital gains tax (CGT) to pay on the profit you make when you sell your investments. But each year you have a CGT allowance which means you only have tax to pay on any gains above the allowance threshold. This is currently £12,300 but it will fall to £6,000 for the 2023/2024 tax year. If you’re thinking of selling any investments, consider doing so before the allowance is lowered.

Watch out for tax on dividends – You can currently receive up to £2,000 a year in dividends without having to pay tax. This dividend tax allowance is dropping to £1,000 from 6 April. If you have any investments that pay dividends and they’re not in an ISA, it’s worth considering moving them into one.

Maximise your pension contributions – Pensions offer another tax efficient method of putting money away for the future, as you receive tax relief on money paid into a pension. Basic rate taxpayers receive 20% tax relief, so for every 80p they pay into a pension, the government tops it up to £1. Higher rate and additional rate taxpayers can claim extra tax relief through their self-assessment tax return, with higher rate taxpayers receiving 40% tax relief, and additional rate, 45%. It’s therefore worth paying as much into your pension as you can afford, within the annual allowance. For most people this is £40,000 a year or their total annual earnings, whichever is lower. The allowance reduces for those earning more than £240,000 a year, up to an income of £312,000, where the allowance drops to £4,000 per year.

Seek professional advice if you’re not sure – If you’re not confident about making investment decisions, seek advice from a wealth planner or independent financial adviser.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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