Bringing home six figures might come with plenty of kudos and allow you to live the life you want, but it brings tax considerations too. If you’re earning £100,000 a year or more, it pays to be up on tax for high earners so you can maximise your returns. We’ve got some key tips to help you do just that.

Understanding tax brackets

So, what is the high earners tax bracket? As a six-figure earner, the tax brackets you need to know about are: 

  • Higher rate (from £50,271 to £150,000): Taxed at 40%. 
  • Additional rate (anything above £150,000): Taxed at 45%.

The 60% tax rate

So, 40 or 45% tax sounds like a lot right? But it’s not the end of the story. You’ve probably heard about the 60% tax rate too, and it’s something you need to be aware of if you earn a six-figure sum.

This effectively comes into play as you chip away at your Personal Allowance when you earn over £100,000.

Everyone in the UK has a tax-free personal allowance, set at £12,570. Once you earn over £100,000 you start to lose this at a rate of £1 for every £2 you earn over. For example, if you earn £1,000 over the threshold it brings a tax rate of £40% (£400), but also knocks £500 off your personal allowance. This means you pay another £200 in tax. So, that’s £600 in tax for £1,000 in earnings. That’s effectively a tax rate of 60%.

Tax planning and timing

The first thing to note is that if you’re earning into six figures, you’ll also have to submit a self-assessment tax return, so HMRC can have a closer look at your money. You don’t get taxed twice, it’s just so the taxman can check everything is properly accounted for.

  • You must first register for self-assessment
  • You’ll need to use form SA100 to file your tax return
  • The deadline to do so is 31st January after the end of the previous tax year – 5th April the year before (you can get fined for filing late)

Jason, RIFT's Head of Finance says:

HMRC will want a full and detailed overview of the money you have coming in and going out. You need to disclose all your income sources, whether employment, interest, share dividends or pensions. You will also need to declare any employment benefits you get too, as well as allowable expenses. That’s the details and the timings covered.

One of the biggest considerations is how you reduce your tax bill to hold onto your tax-free allowance and avoid 60% tax. We’ve got some ideas for you.

Pay into your pension

Each year, you can make a maximum of £40,000 in pension contributions. By increasing these, you can reduce your income to get you below the £100,000 threshold. You’ll earn less each month, but you’ll hold onto your personal allowance and enjoy some tax breaks too. It will also help set you up for retirement as well.

Make charitable donations

Making charitable donations can help push you below the £100k mark. Charitable donations in the UK are tax free, and you’ll be doing something good for the world as well.

Trade off company benefits

Think about trading off some of your salary to keep you below the £100k bracket, such as via a company car or private healthcare. 

It’s usually done through a salary sacrifice scheme, so the cash is taken from your pre-tax salary. It will help you stay below the £100k threshold and will also reduce your tax bill in the long run on things you may have previously paid for from your post-tax salary.

Maximise the advantage of EIS investments

By investing some of your income in Enterprise Investment Scheme (EIS) investments – usually early stage start-ups and scale-ups – you can claim up to 30% income tax relief on your investment.

Use your ISA allowance

Every year, you can pay up to £20,000 into an ISA, as your ISA allowance. Any returns you make on your ISA are free of income tax, capital gains tax and dividends tax.

A stocks and shares ISA is always a good idea to maximise your investments. And as of the new tax year, you can spread this £20,000 ISA allowance across multiple ISAs. This means you can maximise your investments across a range of stocks and shares ISA providers.

Understand the capital gains allowance

The capital gains allowance has been reduced again in the current tax year, halved from £6,000 to £3,000. Now, if you make financial gain on an investment – outside of an ISA or another tax efficient investment – you have a capital gains allowance of £3,000 a year. It makes sense to use it.

Seeking professional advice

HMRC asks high earners to submit a self-assessment tax return as you’ll likely be in a more complicated tax position than the average earner.

Complicated is the key word. Your finances might be coming from multiple sources, each with their own tax considerations. And as we’ve already stressed, it really pays to stay below that six-figure mark. You might be a high-flyer and top of your field, but it makes sense to get an expert in to deal with it on your behalf.

Not only will they assist with strategies and innovative ways to get your earnings below the £100k bracket, but they’ll also be on hand to deal with any legalities too. That includes claiming the 20-25% tax relief on your pension contributions and staying on the right side of the tax intricacies around child benefit.

Get the most out of your money

When you’re a six-figure earner, it’s crucial to make the most of your money and reduce your tax bill where possible. At RIFT Refunds, we do the heavy lifting for you and help you maximise your income in the process.

Our team makes tax relief easy and stress-free. We handle everything on your behalf and provide personalised advice tailored to your situation. Get in touch with RIFT and start the process today.