How to manage tax and estate planning as a high earner

As a high net worth individual, it can be difficult to balance a demanding and stressful job with managing your financial affairs.

While the rewards of a senior executive role can be significant, the financial implications of hasty decisions or missed opportunities can be correspondingly large.

Failing to find time to engage with your finances could lead to allowance and threshold breaches, unexpected charges, or see you leave a huge tax liability to those you ultimately leave behind.

Thankfully, expert financial advice can help you manage your wealth tax-efficiently, ensuring your money is working hard for you and your loved ones.

Here are three important factors to consider.

1. Minimise your liability using tax-efficient wrappers

As a high-earner, your high tax rate can quickly eat into the interest you earn, the gains you make, and the dividend income you receive.

Investing offers the potential for sizeable returns, but you’ll want to shelter this money from tax where possible.

Pensions

One particularly useful wrapper is your pension.

Your pension contributions benefit from relief at the highest rate of tax you pay and the removal of the Lifetime Allowance has also provided new opportunities for pension saving. You will, though, need to be wary of its replacements, the Lump Sum Allowance and Lump Sum and Death Benefit Allowance.

For the 2024/25 tax year, you can tax-efficiently contribute up to £60,000 into your pension, thanks to the Annual Allowance. However, your allowance could be lower if your income triggers the Tapered Annual Allowance.

The taper applies to individuals with “adjusted income” of more than £260,000 a year (and “threshold income” exceeding £200,000). The taper reduces your standard allowance by £1 for every £2 of income that exceeds £260,000.

A maximum reduction of £50,000 applies for those with “adjusted income” of more than £360,000. This would limit your tax-efficient contributions to just £10,000 a year.

Whatever the level of pension contributions you can make, be sure to claim your full tax relief entitlement.

MoneyWeek recently confirmed that a massive £1.3 billion of pension tax relief went unclaimed in the five years to 2020/21. It’s simple to claim via your self-assessment tax return.

ISAs

ISAs are also incredibly tax-efficient. You have an annual ISA Allowance of £20,000, spread across all of the ISAs you hold, but you might consider contributing to a partner’s ISA to max out their allowance too.

You don’t pay tax on the interest you earn in a Cash ISA, while gains in a Stocks and Shares ISA are free of Income Tax and Capital Gains Tax (CGT).

Rule changes for the 2024/25 tax year make ISA investing easier and more flexible than ever. Previously, you could only open and pay into one Cash ISA and one Stocks and Shares ISA in a single tax year. Now, though, you can open and pay into as many as you like (excluding the Lifetime ISA), although the same £20,000 allowance applies.

Once this has been used up, you’ll need to look for other tax-efficient opportunities. We can help you here so get in touch.

2. Keep on top of changing thresholds and allowances

Engaging a financial planner can free up your time and provide peace of mind that your wealth is in safe hands.

Keeping track of allowances and thresholds might not be top of your day-to-day priorities but recent changes could affect how you manage asset disposals and even your own income.

The CGT Annual Exempt Amount is the level of profit you can make without becoming liable for CGT when you sell (or “dispose” of) certain assets.

Back in 2022/23, it stood at £12,300. From April 2024, though, it has dropped to just £3,000.

The Dividend Allowance has also halved for the 2024/25 tax year. You can now receive just £500 in dividends a year before Dividend Tax is due. If you receive some of your income this way, you’ll need to think carefully about alternatives.

3. Giving while living could help you manage a potential Inheritance Tax liability

You can give as many gifts as you like to loved ones during your lifetime. These gifts are made free of Inheritance Tax (IHT), but only if you live for a further seven years after the date the gift is made.

This is known as the “seven-year rule” and explains why such gifts are known as “potentially exempt transfers”.

You might plan to leave an inheritance on death but consider giving while living too. Giving gifts earlier in your life has numerous advantages, from lowering the value of your estate for IHT purposes to increasing your chances of “beating” the seven-year rule.

There are non-financial advantages too. Your beneficiaries might receive your gift when they need it most, and you’ll still be around to see the difference your money makes.

Remember, too, that some gifts are IHT-free from the outset, thanks to several HMRC exemptions, including the £3,000 annual exemption.

We can help you to think about the best way to manage your wealth during your lifetime and how to leave an inheritance on death.

Get in touch

Juggling financial commitments as a high earner can be tough, but expert financial advice can help you to do so tax-efficiently. To learn more, email us now at advise-me@fosterdenovo.com or call us on 0330 332 7866.

Please note

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.

The Financial Conduct Authority does not regulate taxation and trust advice.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken.

Pension savings are at risk of being eroded by inflation.

The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.

Investments do not include the same security of capital which is afforded with a deposit account.

Sources: https://moneyweek.com/personal-finance/tax/more-than-pound4-billion-of-tax-reliefs-and-perks-are-unclaimed-does-hmrc-owe-you-money