Note to readers: This article was first published in December 2019 – so please excuse festive references! The tips on how to support your high earners with their tax planning remain valid…
As December whizzes by, amongst all the excitement of the festive period, we naturally start thinking ahead to next year. What it might bring; our hopes, plans, dreams and goals. In the financial planning world, the new year is then rapidly followed by our own silly season. The mad rush to make sure finances are in order and appropriate allowances have all been used (but not exceeded) before the tax year ends. And with each last-minute transaction or meeting with advisers, a quiet note to ourselves to make sure we get organised in better time next year…
Start early and help your high earners plan in good time
So, my first tip for helping your high earners with their tax planning is to ensure your communications, and any support you make available, are timed effectively. Start early – but not too early! In December, for example, people probably already have enough to think about. Even the most well-crafted tax-planning communications are likely to get lost in the noise of Christmas parties, secret Santa arrangements and updates on holiday opening hours. However, early January is an entirely different matter. People then tend to be in ‘fresh start’ or ‘get organised’ mode, so this can be a great time to start reminders about actions people might need to take before 5 April.
Of course, the end of the tax year isn’t the only time that high earners need help with taxation issues (but it is an important one!). And tax planning can’t be approached in isolation – it needs to form part of a broader financial plan. The crucial foundation of good financial planning is to assess your ‘needs and wants’ against income and outgoings, develop a plan to achieve your goals in the desired timeframe, and regularly review progress. With expert support and advice, you can then ensure your money is arranged in the most tax-effective way to suit your needs.
Employers can provide two crucial layers of help in this regard:
- Timely, relevant guidance and education – ideally delivered in a variety of ways to maximise engagement
- Access to suitably qualified and experienced financial planning specialists
Tax planning support and guidance in the workplace
Providing support and guidance through tools such as emails, online alerts, videos and workplace seminars, helps to keep your high earners informed about any potential issues so they can plan accordingly. By also facilitating easy access to suitably experienced and regulated advisers, you ensure that everyone is equipped to take appropriate action. This doesn’t mean that you need to fund full, individual financial advice for all of your high earners. Even when dealing with the more complex tax issues that typically arise for this group, simply having the opportunity for a quick confidential guidance meeting can be a huge help. Where full advice is then needed, it is common for employees to meet any associated costs directly.
Who should your high earner support apply to?
Usually when referring to ‘high earners’, we’re talking about anyone earning at least £70,000 a year. But remember, some factors come into play at much lower thresholds. £50,000 a year could be considered the ‘entry point’ for high earners, with both higher rate tax and the loss of child benefit kicking in at this level. At the other end of the scale, some issues won’t bite until you’re earning considerably more. For example, the tapered personal allowance once income hits £100,000 a year, or the tapered annual allowance for income of £150,000+.
What sort of issues might your high earners need help with?
Some tax-planning tips are relevant to almost everyone – and I wrote about this recently (‘why tax guidance is essential for all of your workforce’). However, for high earners, there are a number of additional important considerations. Some of these I have already touched on above, and the list is by no means exhaustive.
Tax-planning considerations for high earners:
- The ‘personal allowance tax trap’ for people earning over £100,000 a year – once earnings hit this level, the personal allowance is gradually tapered away. The overall impact of this is an effective income tax rate of 60% on earnings between £100,000 and £125,000 (for the 2019/20 tax year).
- Retirement planning – in light of the severe restrictions on how much they can save into a registered pension scheme. For anyone with annual income (not just earnings) of £150,000+, the standard £40,000 annual allowance is gradually tapered down – and can fall as low as £10,000. ‘Pensions carry forward’ can provide some wiggle room – but is another complicated area of legislation that typically requires advice.
- Non-pension savings and investment vehicles – building on the above, where people are subject to restrictions on pensions (due to either the lifetime or annual allowance), developing a tax-efficient long-term savings strategy using non-pension vehicles will be an important consideration. In addition to guidance, education and access to advice, employers can help with this by offering broader workplace savings options.
- Company shares – options, grants and purchase deals are rarely straightforward, with complicated and possibly punitive tax implications for getting it wrong.
- The withdrawal of child benefit for anyone earning £50,000 or more a year (this is yet another ‘taper’ arrangement, with child benefit removed completely once earnings hit £60,000 a year). Pension contributions or gifts to charity can effectively reduce your earnings to back below the £50,000 level, meaning entitlement to child benefit is maintained.
Tailored support is key…
High earners have specific financial needs, and the shifting landscape created by continually changing rules and legislation can make effective planning increasingly complicated. For employers, workplace pensions and benefits for high earners can be a potential minefield. Tailored support is crucial to help navigate the pensions and benefits quagmire and steer clear of perilous tax traps!
This article was first published with REBA on 17 December 2019.