Tax planning for high earners

After years of frozen thresholds, reduced allowances, and quiet but powerful fiscal drag, the most recent Budget offered little respite for those deemed ‘High Earners’ which used to be those earning just over £50,000. In fact, for many, it marked a new phase in what’s becoming a stealthy but sustained squeeze on take-home pay.

While many higher earners accept the principle of paying their fair share, there's a growing sense that we’ve hit a tipping point. Tax is no longer just a cost of success; it’s fast becoming a sticking point to long-term financial growth. With more and more people drifting into higher tax bands,  the cumulative impact is starting to bite.

That’s why tax planning is no longer just prudent, it’s essential. If you’re a ‘high earner’ whether that be on a little over £50,000 or well into six figures, navigating the tax system could mean the difference between merely treading water and building real, lasting wealth. From reclaiming lost allowances to making strategic use of pensions, charitable giving, and relief schemes, the opportunities are still there, you just need to know where to look.

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Tax can have a big impact on your ability to preserve the value of your savings and investments in retirement. As such, one of the main focuses when advising clients, is creating a plan that helps them achieve their objectives in the most tax efficient manner. There are several ways to reduce the tax you pay on your annual income, especially if you’re in the higher or additional rate tax bracket.

What are the main taxes?

Income tax

Income tax is a tax imposed directly on your personal income. In simple terms, it is paid at rates between 0% and 45% dependent on which of the income tax brackets you fall into.

Once your earnings exceed your personal allowance, you are required to pay tax on the following sources of income:

1. Income from employment
2. Income from pension
3. Interest on savings
4. Property rental income
5. Employment benefits
6. Income from a trust

As of the 2025/26 tax year:

• The personal allowance remains at £12,570
• Basic rate tax (20%) applies to income from £12,571 to £50,270
• Higher rate tax (40%) applies from £50,271 to £125,140
• Additional rate tax (45%) applies from £125,141+

These thresholds are now frozen until 2031, further extending the impact of fiscal drag.

The tax rates on dividends are lower but again will increase by 2 percentage points for basic and higher rate taxpayers from 6 April 2026.
Furthermore, an additional 2% tax will be introduced from 6 April 2027 on savings interest and property rental income, increasing the tax burden from these sources. If you're a Scottish taxpayer, note that income tax bands differ from the rest of the UK. It's essential to consider regional differences when planning.

Capital Gains Tax

Capital Gains Tax (CGT) is paid on the profit made when you dispose of certain assets, such as shares, second homes, or other investments held outside of a tax efficient wrapper.

Update for 2025/26:

• The CGT annual exemption is £3,000, much lower than £12,300 in 2022/23
  Tax is charged on gains above this allowance at:
• 18% (basic rate) or 24% (higher rate) for individuals (not including carried interest gains) on financial assets and property depending on the tax band the proportion of the gain falls within
• With the CGT allowance significantly reducing in recent years, proper use of tax wrappers (like ISAs and pensions) is crucial.

Inheritance Tax

Inheritance Tax (IHT) is a tax on the value of an estate upon death or on certain gifts made during your lifetime.

• The nil-rate band remains at £325,000
• The residence nil-rate band offers an additional £175,000 if passing a home to direct descendants
• The standard rate of IHT is 40%, or 36% if at least 10% of the net estate is left to charity

From April 2027, pensions will form part of a person's estate for inheritance tax purposes. Currently, pensions are generally outside of IHT calculations, but this will change for most type of pensions. If you're relying on your pension as an IHT-efficient tool, it's important to review your estate planning and options now.

How to reduce taxable income as a high earner

Reducing your taxable income can be one of the most effective ways to lower your overall tax bill. For high earners, this might mean utilising pension contributions, salary sacrifice, or charitable giving to stay within lower tax bands or reclaim lost allowances.
For example, reducing your adjusted net income to below £100,000 can help you reclaim your personal allowance, while staying below £50,270 may mean avoiding higher rate tax entirely. Strategic use of deductions and allowances can significantly reduce the income you are taxed on, without reducing your overall wealth.

Why is tax planning important?

Tax planning involves minimising tax liabilities by utilising allowances,  exemptions, and tax reducers to lowerthe tax you pay, so it should be an essential part of an individual’s financial plan.
Effective tax planning can be instrumental in saving individuals money, maximising wealth and achieving your financial goals. By proactively managing finances and optimising tax planning opportunities, individuals can ensure they are on track to meet their objectives.

What is higher rate tax?

In the UK, we do not get taxed on the first £12,570 we earn from our salary, bonuses, rental income, pensions, and other various income types - this is called our Personal Allowance. Income exceeding the Personal Allowance is then subject to income tax. This is banded so:

• Your earnings between £12,570 and £50,270 are currently taxed at the basic rate of 20%.
• Earnings from £50,271 and £125,140 at the higher rate of 40%.
• Anything above £125,140 is taxed at an additional rate of 45%.

The personal allowance and the higher rate threshold (£50,270) have been frozen until 2031 following an announcement by the Chancellor in the Autumn Statement 2025.

Therefore, more people are and will continue to be pulled into paying 40%-45% tax on their earnings, so it is increasingly important we utilise the tax planning opportunities available to us to minimise the impact of the frozen tax allowances and tax bands.

High earners cutting pay: Should you consider it?

Some high earners are now deliberately cutting their pay or exchanging salary for pension contributions or other benefits as a strategic way to reduce tax liability. This is often done through salary sacrifice or personal pension contributions, which can lower your taxable income, increase pension savings, and in some cases reclaim lost allowances such as the personal allowance or avoid additional tax charges like the High-Income Child Benefit Charge.

Reducing pay might not be a step back, but a smarter move towards long-term financial efficiency. It’s worth speaking to a financial adviser before making any changes, to ensure it aligns with your wider goals and that you aren’t giving up valuable benefits or protections.

Ways to reduce your income tax bill

There are a few ways in which you can reduce your income tax bill. Broadly, they are as follows:

Contribute to your pension

Contributions to a pension are usually made from taxed money unless in  a 'net pay' scheme' or using 'salary sacrifice' . However, when you pay in, you will pay the “net” amount (80% for a basic rate taxpayer). The government will then make up the tax paid on the amount contributed.

For example, if you’re a basic rate taxpayer you can receive tax relief of 20% from the government, therefore it costs you 80p to make a £1 pension contribution. For a higher rate taxpayer the cost is only 60p.

Contribute to your pension via salary sacrifice

You can ask your employer to enter into a salary sacrifice contribution arrangement to your pension, which will reduce the amount of money subjected to the highest rate of income tax (or various rates depending on the tax bands the income falls into after the sacrifice), along with also providing valuable National Insurance savings. This can become quite complicated, and more details can be found on the government website.

A notable additional benefit of salary sacrifice arrangements is that depending on your employer, they may pay the National Insurance Contributions savings they make from the forgone salary into your pension.

Do take care though as the government is planning to make changes to how salary sacrifice for pension contributions work from April 2029 by capping the National Insurance (NI) exemption to £2,000 per year.

Make full use of your pension annual allowance

The annual allowance is currently £60,000 and this is the maximum that you can tax efficiently contribute to a pension each tax year, without suffering a tax charge.  This rose from £40,000 in the 2023/24 tax year.
If you are not subject to tapering of your annual allowance and you have not utilised your full allowance of £60,000, then you could consider making use of the full allowance from a personal contribution or carrying-forward unused annual allowance from previous years. Please note, however, this can only be done up to a maximum of the three previous tax years, and personal tax-relievable contributions are capped at 100% relevant UK earnings regardless of the amount of unused annual allowance.

Make full use of your ISA annual allowance

Both income and growth within an ISA are free of tax making this one of the best savings wrappers in the UK. You can currently contribute £20,000 per year into a Cash or Stocks and Shares ISA however the Cash ISA allowance will be reducing to £12,000 for under 65s from April 2027.

Up to 60% tax relief available when you invest in a Pension

Investing in your pension pot is an attractive option to increase your savings in a tax efficient way. We actively encourage clients, when suitable, to contribute regular amounts to their pension to not only build up their pension pot but also to benefit from tax efficiencies.

For those earning between £100,000 and £125,140 you could be in the 60% tax trap. But this also presents an opportunity when it comes to saving for retirement. If you have taxable income in this range, you can effectively receive income tax relief of 60% on your pension contributions as this is the marginal rate of tax paid on earnings within this band. This is due to the impact of your personal tax allowance of £12,570 being reduced by £1 for every £2 you earn over £100,000 meaning the allowance is reduced to zero when your income reaches £125,140. A pension contribution within this band of earnings effectively reclaims part, or all, of your personal allowance thus increasing the rate of tax relief to 60%.

How to avoid the High Income Child Benefit Charge

For the 2025/2026 tax year in the UK, Child Benefit rates are £26.05 per week for the eldest or only child and £17.25 per week for any additional children, with these rates increasing to £27.05 and £17.90 respectively from April 2026, based on CPI uprating. Payments are usually every four weeks and eligibility applies for children under 16, or under 20 if in full-time education or training, with higher earners potentially facing the High Income Child Benefit Charge (HICBC).

If you are a couple claiming Child Benefit, where one or both individuals have an income above £60,000 per annum, or someone else claims Child Benefit for a child living with you and they contribute at least an equal amount towards the child’s upkeep, you may have to pay a tax charge. This is known as the ‘High Income Child Benefit Charge’.

The tax charge is calculated through the tax return on any partner whose income is more than £60,000 a year. In the event that both partners have incomes over £60,000, the charge will apply to the partner with the higher income. The tax charge will be one percent of the amount of Child Benefit received for every £200 of excess income, meaning that the Child Benefit is completely removed when income reaches £80,000.
One way you may avoid the tax charge is if a personal pension contribution is made, as the adjusted net income used by HMRC will reduce. If the contribution is enough to reduce this to below £60,000, the High Income Child Benefit tax charge will be avoided.

The benefits of charitable giving

Giving to charity is not only good for the cause receiving your donations but is also beneficial to your annual tax bill. If you keep a record of your donations, you will be entitled to report these on your tax return.

The most common way to donate to a UK registered charity or community amateur sport clubs (CASCs) is through Gift Aid. Gift Aid can only be claimed by UK taxpayers and is effectively the repayment of basic rate tax on the donation. This is not repaid to the donor but is given to the charity as they can claim an additional 25p for every £1 they receive.

If you are a higher (40%) or additional rate (45%) taxpayer, you are able to claim the difference between your tax rate and the basic rate of tax (20%) on your total charitable donation. An example of this is shown below:

If you make a charitable gift of £100, the charity will be able to receive £25 from HMRC to reclaim the basic rate tax. As a higher/additional rate taxpayer, you can then claim a further £25 (higher) or £31.25 (additional) relief back via your self-assessment for the £125 (gross) contribution you originally made. To do this, you must register for gift aid with a ‘Gift Aid Declaration’, keep a record of your gifts and gift no more than four times your total income and capital gains tax payment for the tax year in question. More information can be found here.

And not forgetting, charitable giving is a great way to lower your loved one's inheritance tax bill.

Tax relief schemes and other allowances

An investment into a qualifying Venture Capital Trust (VCT), Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) attracts significant tax benefits. For an EIS or VCT, you can receive 30% income tax relief (reducing to 20% for VCTs from 6 April 2026) on the amount you invest, for SEIS this increases to 50% relief. This 30% or 50% is only achievable if you have paid sufficient tax for the year in question. For example, if you invested £200,000 into a VCT, you would receive £60,000 tax relief if you had an income tax bill of at least £60,000.

These investments were created by the government, as an initiative designed to help small and medium sized companies raise finance to grow, by offering tax benefits to investors. Given the type of companies they invest in, they are classified as to be high-risk investments.

They can be attractive to those who have maximised their other allowances for the tax year and are earning a significant salary which takes them into the higher and additional rate tax band.

But, as higher risk investments they are not suitable for all investors. There is a chance that all of your capital could be at risk and you should not invest into these types of plans without seeking expert advice from a reputable firm of independent advisers such as The Private Office.

Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong.  Take 2 minutes to learn more.

How we can help

There are a number of steps that can be taken to reduce the amount of income tax you pay, which are especially beneficial if you fall into the higher or additional rate tax bands. These tax efficiencies are built into our financial plans, and we actively help clients maximise their allowances and income so they can achieve their goals throughout their lives. If you would like to find out more about how The Private Office can help you with personalised tax efficient financial plans, please enquire for a free initial consultation with one of our Independent Financial Advisers.

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The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

The content in this article is for information only and does not constitute individual financial advice.

The value of your investments can go down as well as up, so you could get back less than you invested

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.

Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation. 

The Financial Conduct Authority (FCA) does not regulate estate planning or tax advice.

VCTs are high risk investments and there may be no market for the shares should you wish to dispose of them. You may lose your capital.