Tax Optimisation Archives - Page 3 of 3

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Introduction

It’s often thought that the highest UK tax rate is 45% – but that’s not the case.

If you earn more than £100,000 per year, you could be taxed at a rate of 60% on income between £100,000 and £125,140.

Here’s how it works

If you receive income of £100,000 or more, the rate of Income Tax you pay will be impacted by the gradual removal of the £12,570 Personal Allowance (the amount of income you can receive each year without paying Income Tax). The personal allowance is currently tapered away at a rate of £1 for every £2 of income above £100,000.

Once your income is over £125,140, you don’t benefit from any tax-free Personal Allowance whatsoever.

Here’s an example

Let’s say your salary has increased from £100,000 to £110,000. Here’s how the extra £10,000 would be taxed:

£4,000 – the standard 40% rate of Income Tax for a higher rate taxpayer
Plus £2,000 – the additional Income Tax as the personal allowance is reduced by £5,000

That’s a total Income Tax liability of £6,000 on your £10,000 pay rise – or 60%.

Considerations to mitigating this 60% effective tax rate

Make pension contributions

Contributing more to your pension before the end of the tax year is an efficient strategy to lower your taxable income and avoid exceeding the threshold. This approach offers dual benefits: it decreases your tax liability and enhances your retirement savings concurrently.

Consider this scenario: receiving a bonus or pay increase of £10,000 raises your taxable income to £110,000. By using this to make a £10,000 pension contribution you avoid falling into the 60% tax bracket and so both restore your personal allowance and obtain higher rate relief on the contribution.

It’s worth noting that there’s an annual limit on pension contributions that qualify for tax relief, which is typically the lower of £60,000 or your annual earnings. For higher earners, your pension annual allowance might be tapered down further.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

Other forms of Salary Sacrifice

If your employer offers salary sacrifice, you can choose to give up some of your regular pay or bonus in return for a different benefit.

The choice of benefits varies between employers, but often includes:

Electric or plug-in hybrid vehicle leasing
Childcare vouchers
Cycle to work schemes
Insurance, including life, health and dental

Your salary is then reduced by the cost of any benefits you choose.

What next?

If you would like to discuss how we can help you mitigate Income Tax liabilities, reach out to one of our experts who can discuss with you your individual requirements.

The levels and bases of taxation, and reliefs from taxation, can change at any time, and are generally dependent on individual circumstances.

The basic rate of tax relief of 20% is automatically applied to pension contributions. You must complete a Self Assessment tax return to claim additional rates of tax relief.

SJP Approved xx/xx/xxxx

Should you require more information or have particular questions, we invite you to contact us at your convenience.

Introduction

On 6 March 2024, Chancellor Jeremy Hunt announced in his Spring Budget the government’s intention to reform the UK Resident Non-Domicile regime, into a simpler, fairer arrangement for UK residents choosing to adopt the remittance basis for taxation.

Broadly, from 6 April 2025, individuals in their first four years of UK residence that were non-UK tax resident in the 10 years prior to commencing UK tax residency should qualify for the new “foreign income and gains (FIG) regime”.

For the 2025/26 tax year, individuals who have claimed the remittance basis and are neither UK domiciled nor deemed UK domiciled on 6 April 2025 will only be subject to UK income tax on 50% of their non-UK income arising during the tax year. From 6 April 2026 the full amount of non-UK income will be subject to UK income tax.

Advice for UK Resident Non-Domiciles

At a glance

A one-time 50% reduction on personal foreign income tax for 2025-26 for those losing access to the remittance basis and not eligible for the new 4-year foreign income and gains (FIG) exemption.
A re-basing of capital assets to their value as of 5 April 2019 for sales after 6 April 2025 by current non-domiciles who have used the remittance basis, allowing taxation only on gains since that date.
A Temporary Repatriation Facility allowing non-domiciles to bring pre-6 April 2025 foreign income and gains to the UK at a 12% tax rate for the 2025-26 and 2026-27 tax years.

What’s changing?

Non-domiciles have their permanent home outside the UK. The existing non-domicile tax regime offers these UK residents a choice to adopt the remittance basis for taxation, allowing them to pay tax on UK earnings as any UK domiciled person would, but only pay tax on their foreign income or gains (FIG) when these are brought into the UK.

The upcoming reform, effective from April 2025, will end the remittance basis of taxation for non-domiciles, introducing a more straightforward and equitable system. New foreign income and gains (FIG) arising from April 2025 will no longer receive preferential tax treatment based on domicile status.

Newcomers with a history of 10 consecutive years of non-residence will receive complete tax relief on FIG for a four-year period of UK tax residency starting afterward, during which these funds can be brought to the UK tax-free.

Those already tax resident for less than four years and qualifying for this scheme will enjoy this relief until their fourth tax year ends. This approach simplifies the process, allowing individuals to bring FIG into the UK without a tax charge, promoting their expenditure and investment within the UK.

For the first three years of UK tax residency, non-doms taxed on the remittance basis qualify for Overseas Workday Relief (OWR), which will continue, albeit in a simplified form, under the new regime.

After the transition period, all individuals, regardless of domicile, who have been UK tax residents for more than four years, will pay UK tax on any new FIG, aligning with the treatment of other UK residents.

This revised scheme is more favourable than in countries without a similar system and competitive with those that have similar arrangements for newcomers.

Inheritance tax (IHT) liability also hinges on domicile status and asset location. Currently, non-UK assets of non-domiciles are exempt from IHT until they have been UK residents for 15 out of the last 20 tax years. The government plans to consult on transitioning IHT to a residency-based system. To ensure certainty for taxpayers, non-UK assets placed into a trust by non-UK domiciled individuals before April 2025 will remain outside the UK IHT regime. The details of the new system’s operation are still under consideration, with plans for future consultation. Read more about Estate Planning & Inheritance Tax (IHT).

To ease the transition to this new, simplified system for current non-domiciles, the government is introducing specific transitional measures, including:

A one-time 50% reduction on personal foreign income tax for 2025-26 for those losing access to the remittance basis and not eligible for the new 4-year FIG exemption.
A re-basing of capital assets to their value as of 5 April 2019 for sales after 6 April 2025 by current non-doms who have used the remittance basis, allowing taxation only on gains since that date.
A Temporary Repatriation Facility allowing non-doms to bring pre-6 April 2025 foreign income and gains to the UK at a 12% tax rate for the 2025-26 and 2026-27 tax years.

While new FIG arising in non-resident trusts after 6 April 2025 will be taxable, FIG generated before this date will remain untaxed unless distributed or benefiting UK residents who have been here for more than four years.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

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Insights Category: Tax Optimisation

Avoiding The 60% Income Tax Trap

Introduction

Here’s an example

Considerations to mitigating this 60% effective tax rate

What next?

Should you require more information or have particular questions, we invite you to contact us at your convenience.

Reforming the UK Resident Non-Domicile regime

Introduction

At a glance

What’s changing?

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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