Why high earners also need help with financial management
It would be an easy mistake for an employer to assume their higher paid, more senior members of staff do not require support with managing their finances.
While that’s understandable, it’s perhaps more likely that – although well paid – these employees may also be time poor, so have less time to focus on their own financial planning.
High earners are also subject to a more complex tax regime, so it is important they are aware of – and understand – this so they can make the best possible financial decisions.
Here’s just a few examples of what high earners might need to be aware of:
- A reduction in personal allowance
The current level of income available before income tax is applied is £11,850 (18/19 tax year). This is known as the personal allowance. This allowance goes down by £1 for every £2 an individual earns above £100,000. This means the allowance is zero if income is £123,700 or above.
- Impact on child benefit
Since 7 January 2013, an income tax charge applies to people who claim child benefit and whose income (or partner's income) is more than £50,000 in a tax year. If income is between £50,000 and £60,000, the charge is a proportion of the child benefit received. If it's more than £60,000, the amount of the charge is the same as the child benefit received.
These reductions can be minimised or avoided altogether – one way is by, when calculating an entitlement to child benefit, to make pension contributions that have the effect of adjusting income. However, many senior employees are unaware of this.
- Lifetime allowance
The lifetime allowance (LTA) is a limit on the total value of an individual’s pension savings (either a lump sum or retirement income) that can be taken without triggering an extra tax charge. The lifetime allowance for most people is £1,030,000 in the tax year 2018-19.
There are many financial planning options available to individuals to help negate the effect of an LTA charge. However, similar to the other issues highlighted, many high earning employees are not informed of these options.
- Tapered annual allowance
The annual allowance is a limit on the amount that can be contributed to an individual’s pension each tax year, while still receiving tax relief. Since its introduction in April 2016, people with a taxable income over £150,000 have had their annual allowance for that tax year restricted. This means that for every £2 of income they have over £150,000, their annual allowance is reduced by £1.
The maximum reduction will be £30,000. Therefore, anyone with an annual income of £210,000 or more will have an annual allowance capped at £10,000.
Education can ease confusion
The above points highlight the added complexity involved in the financial affairs of higher earners. However, they can all be eased if they receive the appropriate education and guidance.
It is therefore essential that if employers want to help retain their senior members of staff and ensure they remain fully focused on the success of the business, they should consider offering these employees access to bespoke financial planning guidance.
This has the advantage of making these key employees feel valued, as well as helping you differentiate your employee benefit package from that of your competitors. By reducing the tax burden on employees, this can also give them more disposable income and provision for the future, without an increase to their overall remuneration.
The author is Nick Howarth, employee benefits consultant at Mattioli Woods.
This article was provided by Mattioli Woods.
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