Tax can be a huge financial drain, especially for high earners. With thresholds frozen, tax receipts rising, increasing food and energy prices, and the costs of running a business now also heading up, it’s crucial to ensure financial plans are as tax-efficient as possible.
Indeed, according to research reported by Money Marketing, more people are anxious about their finances now than they were during the Covid pandemic.
With all this in mind, chances are you have clients who may find that a conversation with a financial planner could lead to useful savings.
From claiming pension tax relief to planning ahead to mitigate the eroding effects of Inheritance Tax (IHT), read on for five conversations a financial planner can have with your high-earning clients to help ensure they retain more of their hard-earned wealth.
1. Understand how pension tax relief works and how to claim every penny owed
Pensions offer the opportunity to make great tax savings.
The Annual Allowance in 2024/25 stands at Ā£60,000 (or 100% of your earnings, if lower). This is the amount you can contribute to your pension in a single tax year without incurring an additional tax charge. The allowance includes personal payments, employer contributions, and tax relief.
Tax relief is applied automatically to pension contributions at the basic rate of 20%. So, at the basic rate, contributing Ā£100 to your pension will cost just Ā£80, with the additional Ā£20 provided by the government.
Meanwhile, for a higher-rate taxpayer a Ā£100 increase to your pension will cost just Ā£60 and for those paying the additional rate of 45% it will cost just Ā£55.
However, higher- and additional-rate taxpayers need to claim extra relief through self-assessment. And, to achieve the saving outlined above it’s crucial to take the necessary steps to claim the additional tax relief.
In February 2023, PensionsAge reported that, between 2016/17 and 2020/21 unclaimed pension tax relief reached an eye-watering Ā£1.3 billion.
At a more granular level, in 2020/21, higher-rate taxpayers failed to claim an average of Ā£425 each. During the same year, additional-rate taxpayers each left an average of Ā£527 unclaimed.
So, one good habit your high-earning clients could adopt in 2025 is to start claiming any extra pension tax relief owed. Then, pay the money you receive directly into their pension to increase their retirement savings and capitalise on the valuable tax relief.
A financial planner will explain what all this means for your clients based on their personal situation and help them establish handy pension habits to help maximise their retirement savings.
2. Carry forward any unused pension allowance
Pension carry forward rules can be a helpful way to utilise any unused Annual Allowances from the past three tax years.
At the time of writing, clients could contribute up to Ā£60,000 for the 2023/24 tax year and up to Ā£40,000 from 2022/23 and 2021/22.
Including the current tax year, as long as earnings are high enough, clients could contribute up to Ā£200,000 to their pension pot and receive pension tax relief at their marginal rate.
One caveat to bear in mind: to use this rule, individuals must have been a member of a UK registered pension scheme in the years they wish to carry forward unused allowances from.
3. Increase pension contributions to help offset Income Tax
The Personal Allowance sets the amount you can earn before you have to pay Income Tax.
Since 2022, the Personal Allowance has been Ā£12,570, and it’s set to be frozen at this level until 2028.
And, for high earners, there’s more bad news.
If your income exceeds Ā£100,000 your tax-free Personal Allowance is reduced at a rate of Ā£1 for every Ā£2 of income over Ā£100,000. If income is Ā£125,140 or above, you lose your Personal Allowance altogether.
One way your clients could reduce their net income is to contribute more to their pension. This strategy could help to restore all of, or a portion of, their Personal Allowance while also allowing them to benefit from tax efficient retirement savings.
A financial planner will work to find appropriate tax savings, helping to reduce tax paid and maximise tax-efficient investment opportunities.
4. Donāt miss out on other annual allowances
As well as maximising tax-efficient pension contributions, every individual can also invest up to Ā£20,000 in an ISA (2024/25). Interest or returns on any wealth held in an ISA is free of Income Tax and Capital Gains Tax (CGT).
With a variety of savings and investment possibilities, a financial planner can explain which would be most suitable depending on the clientās needs.
Read more: 5 inspiring tips for becoming an ISA millionaire
As well as strategic saving through pensions and ISAs, high earners should ensure they are making full use of their Dividend Allowance and Capital Gains Tax Allowance.
The Dividend Allowance
For clients who own shares in a company, itās likely that they’ll receive a dividend payment.
Dividends are taxable, but every individual has an annual Dividend Allowance. For the 2024/2025 the allowance is Ā£500. This means you only pay tax on dividends you receive above that amount.
The rate of tax owed on dividends above Ā£500 depends on your Income Tax band:
- Basic-rate taxpayers pay 8.75%.
- Higher-rate taxpayers pay 33.75%.
- Additional-rate tax payers pay 39.35%.
The Dividend Allowance is the same for everyone and it can’t be carried over to the following year.
The Capital Gain Tax Allowance
Everyone can realise a certain amount of capital gains, or profit, before they having to pay tax.
In 2024/25, the Annual Exempt Amount is Ā£3,000, but any profit exceeding this amount may be subject to CGT.
The rules on CGT can be complex, so a conversation with a financial planner can help clients make the most of the Annual Exempt Amount and ensure that they donāt pay more tax than they need to.
Read more: How to keep your Capital Gains Tax bill as low as possible
5. Plan ahead to mitigate Inheritance Tax
The IHT nil-rate band has been frozen at Ā£325,000 (or Ā£500,000 when passing a home to children or grandchildren) since 2009. Currently frozen until 2028, itās likely that your clients ā especially wealthy ones ā will need to consider ways to reduce their potential IHT liability in order to preserve as much wealth as possible for their family and loved ones.
Read more: How to protect your clientsā wealth from a greater Inheritance Tax risk
With the āgreat wealth transferā underway, some of your clients may welcome reassurance that they are taking appropriate steps to manage their estate tax-efficiently to ensure their hard-earned money ends up where they wish.
If you have clients who are worried that their estate could attract an IHT bill, encourage them to talk to a financial planner sooner rather than later.
Get in touch
As the end of the current tax year end approaches, if you have clients who might benefit from a conversation about their 2024/25 tax bill or potential future tax savings, please get in touch.
Email mail@delaunaywealth.com or call us on 0345 505 3500.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning or tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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