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14 Nov 2018
by Nathan Long

How to support high earners with long-term tax planning

Higher-earners are feeling the strain. With increasing pressure on the government to act in the interest of the average worker, it makes them the easy targets for higher taxes.

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People within your business could be impacted by this squeeze. What’s worse is they’re often the bosses, which means HR teams will feel under greater pressure to find solutions to help.

Financial know-how doesn’t necessarily increase with wages

It’s a common misconception that higher earners are savvier with their finances. We suspect it stems from the idea that higher earnings generally go hand-in-hand with higher disposable income, bringing more opportunity to save and invest for the future.

But we’re always looking at how people engage with their workplace pension, and our stats don’t support this viewpoint.

The proportion of our members engaging with their pension increases with salary to a high of 88 per cent of those earning between £65,000 and £100,000. But this trend is reversed for those earning more than £100,000 (only 76 per cent of members with salaries at this level engage).

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High earners, low engagement?

We’re not convinced that this lower engagement is because the highest earners are less interested. Everything else we know about how members engage with their workplace pension suggests the bigger the pension pot, the higher their engagement.

We also know that higher earners are more likely to commit time to manage their finances – with 82 per cent of those earning above £100,000 prepared to deal with their finances at least once a month, compared with only 69 per cent of those earning below this level.

We know it’s the complexity of tax and pension rules that’s causing this dip in engagement among the highest earners. For starters, they lose £1 of their personal tax-free allowance for every £2 above £100,000 they earn, meaning in the current tax year it’s all gone by the time their earnings reach £123,700. The effective rate of tax for this level of earnings is an eye watering 60 per cent. What’s worse is only a few people know about this quirk.

The 45 per cent tax band kicks in for those earning more than £150,000, but pension contributions, which are the number one antidote for paying excess tax, are limited for people with income above this level.

Rule changes impacting the highest earners

Surprisingly, the Budget did not go in for further raids on top earners, despite plenty of speculation that it would.  

This is a welcome development for higher earners. Over the past few years they’ve seen changes to taxation on second homes, buy-to-let income and dividends, as well as limits to the amount that can be paid into a pension. This constant state of flux means higher earners who were on top of their affairs several years ago could be in a state of uncertainty now.

Tax is a reality we can’t avoid. But what’s also true is there are allowances available, designed for investors to make more of their money – so there’s still plenty that higher earners can do.

Maximising pension contributions remains a good tool against paying too much tax. It’s also important to organise any existing savings and investments tax efficiently by using ISAs and allocating monies carefully between family members.

Lifetime ISAs are useful as a home for tax-efficient savings for the under 40s. Higher risk investments like Venture Capital Trusts are also an option for those who’re more adventurous – if they’re prepared to risk losing all or most of the amount invested.

The role of reward professionals – four steps to helping your high earners

Reward professionals can help their highest earners navigate this complex set of rules by following four clear steps.

1. Flag the issues. The good news is nobody likes to pay too much tax, so you’ll have an interested audience.

2. Provide guidance. The issues are complex but don’t bury your head in the sand. Partner with an expert company that can provide financial education. This will drive higher awareness of the issues and help your highest earners understand how they apply to them.

3. Offer wider workplace savings. Your highest earners may find their ability to use pensions to reduce their tax bill has been reduced. Offering access to wider savings through the workplace, like the ISA and Lifetime ISA, opens up a range of other options and keeps your benefit package relevant.

4. Offer expert advice. Your highest earners may lack the time or inclination to get to grips with the problems they face. Offer access to financial advice to your highest earners – it can really take a weight off their shoulders to have a personal recommendation from an expert.

With constant change comes the need for reassurance. Reward professionals can be perfectly placed to provide the framework for staff to help themselves, or know where to go for help.

The author is Nathan Long, senior analyst at Hargreaves Lansdown.

This article was provided by Hargreaves Lansdown.

Hargreaves Lansdown is sponsoring REBA’s Innovation Day, taking place on 22 November at County Hall, London.

In partnership with Hargreaves Lansdown

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