How to minimise your tax as a higher earner

When your salary increases, it can suddenly feel like you have loads of free cash at the end of the month. But in some cases, your salary may rise a significant amount – but you end up with less of it than you expected.

This may be because you’ve crossed over into a higher tax bracket, which means a higher rate of tax is charged on any income over a certain amount. That means more of your money is going to tax, and less into your pocket.

Once you start earning above £50,270, every pound over that amount is charged at 40% tax. Over £125,140, it’s charged at 45%.

Many people are also stung around the £100,000 mark, as you lose a lot of tax benefits when you earn over this amount.

For example, your personal allowance – the amount you earn without paying tax – starts to reduce. For every £2 you earn over £100,000, your personal allowance is reduced by £1. You also lose tax-free childcare and other free childcare hours.

How to take home more of your money

One of the best ways to keep more of your income as a higher earner is to redirect more of your earnings into your pension. Money put into your pension is tax-free, so you get to keep the extra rather than giving it to HMRC.

Be aware that the current standard annual allowance – the amount you can put into your pension each year – is £60,000, but it can be lower for high earners. However, you can ‘carry forward’ any unused allowance from the three previous tax years if you need to put a lot away in one year. 

If you’re trying to avoid the ‘£100k tax trap’, you could also consider making charitable donations to bring your salary down below this threshold. This means you’ll keep your personal allowance and childcare benefits.

Charitable donations through Gift Aid extend your basic rate tax band, reducing your higher-rate exposure. For example, a £1,000 donation could increase your basic rate band by £1,250.

Saving your money into an ISA can help you keep more of your savings. Interest or returns earned inside an ISA are tax-free, so you get to keep every penny.