When it comes to managing your finances, earning over £100,000 can come with its own set of challenges. The tax implications and financial decisions you need to make can be complex and overwhelming.
That's why it's important to consider whether you need financial advice to navigate this territory effectively.
In this insight, we'll explore the reasons why seeking financial advice is crucial for high earners and how it can help you make informed decisions answering the question, do I need financial advice if I earn over £100k.
Yes, financial advice is essential for high earners exceeding £100,000. It helps navigate the 60% tax trap, maximise pension contributions, plan comprehensively, stay informed on tax rules, and accumulate long-term wealth effectively.
One of the key reasons why financial advice is essential for individuals earning over £100,000 is the 60% tax trap:
The 60% tax trap occurs due to the tapering of the personal allowance, resulting in an effective tax rate of 60% on a portion of your income. Let's delve into how this happens and its implications.
The personal allowance is gradually reduced by £1 for every £2 of income earned above £100,000. This means that individuals earning between £100,000 and £125,140 face a higher tax rate. For every £100 of income in this range, only £40 is retained after deducting income tax and lost personal allowance. This effectively translates to a 60% tax rate.
It's important to note that the tax rates and thresholds mentioned may differ based on your location in the UK. For instance, individuals in Scotland may face an even higher effective tax rate due to the different tax bands.
One effective way to reduce your taxable income is to increase your contributions to a registered pension scheme. This element of retirement planning works by redirecting a portion of your income into your pension, you can lower your adjusted net income and potentially regain your full personal allowance. This can help you avoid the 60% tax rate and benefit from tax relief on pension contributions. Be aware of the annual pension contribution limits and consult a financial advisor to ensure you make the most of this tax-efficient strategy.
Deciding whether to contribute more to your pension when you earn over £100,000 requires a thoughtful evaluation. Here are some factors to consider:
Tax Efficiency: Pension contributions benefit from tax relief, which means you get tax benefits on the amount you contribute. Increasing pension contributions can reduce your taxable income, potentially helping you avoid the 60% tax trap.
Annual Allowance: Be mindful of the annual pension contribution allowance, which is currently £40,000 in the UK. Contributing more than this limit may result in tax charges, so ensure you stay within the prescribed limits.
Access to Funds: Funds in your pension are typically not accessible until you reach retirement age. Consider if you're comfortable with locking up a significant portion of your income until retirement.
Some employers offer salary sacrifice schemes, allowing you to exchange a portion of your salary for non-cash benefits, such as increased pension contributions, childcare vouchers, or cycle-to-work schemes. This can help lower your taxable income and mitigate the 60% tax trap.
Consider investing in tax-efficient products, such as Individual Savings Accounts (ISAs) and Enterprise Investment Schemes (EIS). These investments can help reduce your taxable income and offer tax incentives, although they come with certain investment restrictions and risks.
When you're earning over £100,000, investing wisely is crucial. You have more to invest, so consider a mix of assets like stocks, ETF's and bonds to spread risk. Be sure to make the most of your tax-efficient options, like a Stocks and Shares ISA. These accounts allow you to invest up to a certain amount each year without paying capital gains tax. Regularly adding money and adjusting your investments as needed can help you reach your financial goals.
If you don't want to manage your own investments, a financial adviser will be able to set a plan, bespoke for your needs on how to invest. This is known as investment planning.
If you are looking to manage your own investments, a good place to start would be Hargreaves Lansdown. Hargreaves lansdown allow you to open a stocks and shares ISA and select which stocks you want to invest in, alongside a range of exchange traded funds.
If you receive bonuses as part of your income, plan their timing strategically. Spreading bonus payments over multiple tax years or delaying them to a year when your income falls below the £100,000 threshold can help reduce your tax liability.
Charitable donations can reduce your taxable income. Consider making charitable contributions to eligible organizations to lower your adjusted net income and potentially avoid the 60% tax rate.
Consult a financial adviser who specialises in tax planning and high-earning individuals. They can provide personalised strategies and advice tailored to your specific financial situation, helping you make informed decisions to avoid the 60% tax trap.
High earners often face the challenge of the 60% tax trap, which results from a reduction in the personal allowance. Financial advisors can provide strategies to minimise tax liability by making informed decisions about pension contributions, salary sacrifice, and bonus management. This expertise helps you avoid the 60% tax rate and optimise your tax position.
Increasing pension contributions is an effective way to reduce tax liability. By redirecting a portion of your income into your pension, you can lower your adjusted net income and regain your full personal allowance. This not only helps avoid the 60% tax trap but also provides tax relief on pension contributions.
High earners often have complex financial situations, including investment portfolios, estate planning, and risk management. Financial advisors can create a holistic financial plan that aligns with your goals and maximizes your wealth. Their guidance ensures that your financial well-being is well-maintained.
Tax laws and regulations can change frequently, making it challenging to stay updated. Financial advisors specialize in monitoring tax modifications and understanding their implications. Working with an advisor helps you stay informed about rule adjustments, allowing you to adapt financial strategies accordingly and remain compliant with tax regulations.
Financial advice extends beyond immediate tax planning, focusing on long-term wealth accumulation and preservation. Skilled advisors identify investment opportunities, diversify portfolios, and leverage compounded returns. Their expertise helps you build a strong financial foundation for the future, allowing you to work towards your long-term financial goals with confidence.
You'll be required to complete a Self Assessment tax return, even if you don't typically file one. To ensure compliance, you must register for Self Assessment by 5 October following the tax year in which you earned the income exceeding £100,000. It's important to meet this obligation to accurately report your income and meet any associated tax liabilities.
Earning over £100,000 comes with its own set of financial challenges, and seeking financial advice is crucial to navigate this territory effectively. From mitigating the 60% tax trap to comprehensive financial planning, financial advisors play a vital role in optimising your financial situation. They provide the expertise and guidance necessary to make informed decisions, stay updated on changing tax rules, and build long-term wealth. So, if you earn over £100,000, don't hesitate to consult a financial adviser who can help you make the most of your hard-earned money.
Stuart is an expert in Property, Money, Banking & Finance, having worked in retail and investment banking for 10+ years before founding Sunny Avenue. Stuart has spent his career studying finance. He holds qualifications in financial studies, mortgage advice & practice, banking operations, dealing & financial markets, derivatives, securities & investments.
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