QUESTION: How can high earners in Northern Ireland reduce their tax liability and maximise their savings?
ANSWER: For high earners in Northern Ireland, the January tax payment deadline can loom large, but there are several strategies you can adopt to reduce your tax liability. Here’s how to ensure you’re making the most of the options available under the tax system.
In Northern Ireland, you are classified as a higher-rate taxpayer for tax year 2024/25 if your income exceeds £50,271. For those earning over £125,140, the additional rate of tax applies.
It’s important to note that if your earnings exceed £100,000, your personal allowance begins to taper, reducing by £1 for every £2 earned above this threshold. By £125,140, the allowance is completely withdrawn.
Earnings include salary, self-employed income, rental income, and investment returns, all of which contribute to your taxable income.
What can you do to reduce your tax bill?
1. Contribute to your pension
Pension contributions are one of the most effective ways to reduce your taxable income and prepare for retirement:
- Personal Pensions: Contributions automatically attract 20% basic-rate tax relief, added by your pension provider. If you pay higher-rate tax, you can claim additional relief through your tax return.
- Workplace Schemes: Salary sacrifice arrangements allow pension contributions to be deducted before tax, reducing your taxable income.
This dual benefit of lowering your current tax liability while building your retirement fund makes pensions a key consideration.
2. Support charities through Gift Aid
Gift Aid enables charities to reclaim basic-rate tax on your donations, increasing the value of your gift. As a higher-rate taxpayer, you can reclaim the difference between the tax paid and the amount received by the charity. This is done either through your tax return or by adjusting your tax code.
3. Use Your Allowance.
- ISA Allowance: Interest earned within an ISA is tax-free, making it a valuable tool for higher earners whose savings income allowance is limited to £500 per year.
- Dividend Allowance: The £500 annual tax-free dividend allowance (2024/25) helps reduce tax on investment income. Dividends above this amount are taxed at 33.75% for higher-rate taxpayers and 39.35% for additional-rate taxpayers.
Making full use of these allowances can significantly lower your overall tax bill.
If your income falls between £100,000 and £125,140, you effectively face a 60% tax rate due to the tapering of your personal allowance. You can manage this by reducing your taxable income - for example, by increasing pension contributions or charitable donations.
Earning over £60,000 makes you liable for the High-Income Child Benefit Charge. This tax increases with income and eventually equals the full value of the benefit at £80,000. You might consider opting out of receiving child benefit to simplify your finances.
If you plan to sell an asset, consider the timing to make the most of your annual CGT exemption. Spreading sales across multiple tax years can help you avoid higher CGT rates and ensure you stay within the exemption limit.
There are some additional tax-saving opportunities including:
- Invest in start-ups: Schemes like the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), and Venture Capital Trusts (VCT) offer tax relief for investments in qualifying businesses, making them attractive for individuals with surplus income.
- Inheritance tax (IHT) planning: Consider making gifts to family members. If you survive seven years after making these gifts, they fall outside your estate for IHT purposes.
Malachy McLernon (malachy.mclernon@aabgroup.com) is partner at AAB Group Accountants Ltd (www.aabgroup.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies
