Record numbers paying 45% tax – here’s how to reduce your income tax bill

According to figures published by HMRC on 30 June 2021, more people than ever face paying the 45% rate of income tax on the top band of their earnings following a decade-long threshold freeze.

What is the additional rate threshold?

The £150,000 additional threshold is the point at which the top 45% income tax rate kicks in – it has not changed since it was first introduced in 2010/11 in spite of steady inflation and wage rises.

So, more individuals have been caught meaning that 440,000 are forecast to pay 45p for every £1 they earn over £150,000 this financial year. This is 10% more than in 2018/19.

The number of individuals paying the higher rate is only expected to rise, after a five-year freeze on allowances was announced at the Spring Budget.

Whether you are subject to income tax at the higher 45% rate or not, there are legitimate ways to reduce your income tax bill.

How to reduce your income tax bill

Pension contributions

Pension contributions attract relief at the same rate you pay income tax and also reduces your taxable income. You can normally put £40,000 a year into a savings pot, although this annual allowance starts to taper away once your annual earnings exceed £200,000. You can use any unused pension allowance from the last three years to make a bigger contribution in one go.

Venture capital investment schemes

Venture capital investment schemes may be an option for higher earners who have already exhausted their pension saving options.

Both Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS) provide relief of 30%. You can put £200,000 a year into VCTs, and you can normally put up to £1m into EIS each year. This means a potential saving of £60,000 on a VCT and £300,000 with an EIS.

The relief can be clawed back if the investment is sold prematurely or ceases to qualify. The clawback periods are five years for VCTs and three years for EISs.

It must be borne in mind though that both investment schemes put money into mainly fledgling firms making them incredibly high risk, and far riskier than most investments found in a typical pension plan.

Get in touch

There are investment options available which can reduce your income tax bill. For tailored advice contact Cowgills Wealth Management Team on 01204 414 243.

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