Could you join the one in five?

If you are not a higher rate taxpayer now, you may be soon.

The combination of high inflation and frozen tax thresholds is a toxic mix for taxpayers. Figures from HMRC and the Office for Budget Responsibility show that the four-year freeze to the UK-wide higher rate tax threshold will create over two million new higher rate taxpayers by 2025/26. In Scotland, the freeze only applies to savings and dividend income, but the Scottish higher rate threshold for other income (primarily earnings) is lower at £43,662 and the rate 1% higher.

Mitigate the hike

If you are – or will soon be – a higher rate taxpayer, there are plenty of tax planning points you should review with us, including:

• Ensure that you take full advantage of all your tax allowances, such as the dividend allowance and the personal savings allowance.

• Explore the many opportunities presented by independent taxation if you are married or in a civil partnership.

• Maximise ISA investments – the UK tax-freedom of ISAs is more valuable once you pay higher rate tax.

• Review investments – investment returns in the form of capital gains (maximum rate 20% other than for residential property and a £12,300 annual exempt amount) will normally incur much less tax than income.

• Business owners may have scope to change the structure or adjust the way profits are extracted.

• The higher rate of 40% (or 41% in Scotland) income tax also means that you can receive 40%/41% in Scotland on pension contributions. However, beware the pension annual and lifetime allowance tax traps.

 

Investments do not offer the same level of capital security as deposit accounts.

The value of your investment and any income from it 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.

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

For ISAs investors do not pay any personal tax on income or gains.

The Financial Conduct Authority does not regulate tax advice.

Tax treatment varies according to individual circumstances and is subject to change.