EARNERS OVER £100,000 PER YEAR
If your combined earnings for the year are more than £100,000 then you will meet self-assessment criteria and be required to complete a tax return each year. The reason for this is because once you earn over £100,000 then you will start to lose entitlement to your personal tax-free allowance. The tax-free allowance for 2018/19 was set at £11,850; however, for every £2 that you earn over the £100k mark you will lose £1 of your personal allowance.
For example, if your combined income for the year is £110,000 then you will lose £5,000 of your personal allowance, and therefore in 2018/19 the tax-free allowance would be restricted to £6,850.
Unfortunately, there are further restrictions applied to higher earners in terms of the allowed pension contributions per year. The maximum that any individual can contribute to pensions (both workplace and private pensions combined) is £40,000 per year. However, when your earnings per year are more than £110,000 per year (after any private pension contributions are taken into account), then your annual pension allowance can start to be restricted and will require careful calculation to determine your actual personal allowance which can vary year on year. If either you or your employer contributes more into a pension plan that your annual allowance then there is an additional tax charge levied by HMRC.
Some of our higher earning clients chose to make investments into schemes which provide generous tax breaks. The main tax reducers are investments into the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS), Venture Capital Trusts (VCT) or Social Investment Tax Relief (SITR).
All of the above investment strategies involve significant risk to the capital invested and will usually be partaken with the expert advice of an independent financial adviser. While we cannot make any recommendations with regards to these types of investments, we can advise on the tax treatment and potential tax savings should you decide that this is the right course of action for you. Speak to a tax consultant today should you wish to discuss any of the tax reducers in more detail and ensure that your claim for tax relief is made on time.