5 opportunities to help additional rate taxpayers today.

Additional taxpayers are on the rise, and more than ever need your advice on how to keep hold of more of their cash.

The 45% additional rate of tax was introduced in April 2010, set at £150,000. By Hargreaves Lansdown’s calculations if it had risen with wage inflation since, it would now be £239,928. However, it has been cut to £125,140.

The result? There are now around 1,130,000 additional rate taxpayers this year, almost five times as many (236,000) as in 2010 when the rate was introduced.

Additional rate taxpayers face a triple whammy; higher income tax, the loss of their personal savings allowance, and a higher rate of tax on savings and dividends.

Financial advisers will know there are tax efficient ways to manage a higher earner's money. But it can be worth reminding clients themselves. Hargreaves Lansdown have come up with a handy checklist to share with those facing the 45p income tax rate – handy as conversation starters ahead of client meetings.

1. Sacrifice salary into your pension.

Workplace run a salary sacrifice scheme? Give up some salary in return for pension contributions. If you pay additional rate tax, then on your last £1 of earnings you’ll face income tax at 45% plus National Insurance at 2%, so you’ll take home 53p. If you sacrifice it into your pension instead, you’ll get the full £1. Some employers will pass on some of their NI saving too.

2. Carry forward any unused pension contributions

Carry forward any unused annual pensions allowance from the previous three tax years, and get tax relief at up to 45%. Paid tax at a lower rate in previous years? The tax relief will be more rewarding in the current year. You can only use allowances that take your contributions up to the level of your income this tax year.

3. If you will earn less in future, consider deferring income

Expect to be paying a lower rate of tax in future? Consider whether you can take income then rather than now. Maybe use fixed term savings that pay interest annually, instead of easy access paying more frequently. This often makes sense just before retirement.

4.  Shelter as much of your income-paying assets in ISAs as possible

Income tax rates are usually higher than capital gains tax rates, so it’s worth prioritising sheltering income paying assets. If you hold them outside an ISA, you can use the share exchange process (also known as Bed and ISA), to move them into one.  

5. Consider your cash ISA

When you become an additional rate taxpayer, you lose your personal savings allowance overnight and pay 45% on your interest, so you’re better off in a competitive cash ISA than the equivalent savings account. An additional rate taxpayer paying tax on their savings would need to make 8.9% interest to match the return on an ISA paying 5%.

Gillian Langley, paraplanner at The Timebank commented, “These pointers are extremely useful in today’s climate and a brilliant way to add value to your clients.  As a client’s circumstances gets more complicated, there are more opportunities like VCT and EIS.”

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