AJ Bell analysis of HMRC data shows that to be among the top 20% highest earning taxpayers, you need to make £49,900, and to be in the top 10% you need to make £67,400. There will be people on these kinds of incomes who don’t consider themselves wealthy, but it doesn’t matter what you think: it’s what the government thinks that counts when it comes to tax.
Being considered wealthy feels like a nice problem to have, but it comes with risks. At a time when taxpayers are being squeezed at every turn, those with the broadest shoulders are taking the brunt of the heavier load. If the government decides you’re wealthy, there’s a risk you’ll be in the frame for whatever tax tweaks lie in store next.
The alternative is to focus on how much wealth people actually hold. ONS statistics show that in 2022, the wealthiest 10% of households held at least £1,200,500 of assets. This consisted of £624,000 of property, £626,000 of pensions wealth, £218,000 in savings and investments, and £123,000 of personal belongings.
Why does it matter?
Successive governments have used higher earners as useful tax-producing machines. The freezing of the income tax thresholds has meant higher rates of tax cut in earlier down the pay scale. So, for example, in 2021/22, when the thresholds were first at their current level, you would have to be in the top 16% of earners to pay higher rate tax.
In 2023/24 you would only need to be in the top 19%, and in the years since it would have spread even further. The problem with this approach is that not all high earners are equal from a total wealth perspective. While some have built up significant assets, others haven’t – especially if they haven’t earned at this level for long.
Successive governments have also targeted savers and investors, taxing wealth as it grows by cutting annual allowances for capital gains and dividend tax, as well as increasing the rates. The issue with this approach is that people tend to hold more wealth as they get older, building to a peak when they retire before spending their way through their assets in retirement. Dipping into this wealth means there will be less to fund retirement for a longer period as people live longer.
Recent governments have also increasingly focused this tax on wealth at the end of life, by freezing inheritance tax thresholds and bringing pensions into the inheritance tax net. It means those who are relying on an inheritance to fill a hole in their finances, such as their retirement savings, could find themselves falling horribly short.
How can you protect yourself?
Pension contributions attract income tax relief at your highest marginal rate, so are a brilliant way to bring down the amount of tax you pay at higher rates, while boosting your income in retirement.
Salary sacrifice schemes are set to get less generous in 2029, but will still be a valuable tool for employees and there’s still ample time to take advantage.
Money saved in a Cash ISA can grow completely free of income tax, so consider the best home for your savings. Investments within Stocks and shares ISAs are free of both dividend tax and capital gains tax, so are a sensible place to start.
What about assets outside a tax wrapper?
If you have existing investments outside an ISA, you can consider using a Bed and ISA to move up to £20,000 worth into the tax wrapper in the current tax year – as long as you have the ISA allowance available.
Take advantage of your capital gains tax annual allowances, realising gains within the £3,000 allowance each year as you go along. You can also use any losses to offset gains made in the same tax year, to reduce the amount that could be subject to tax.
If you’re married or in a civil partnership, you can share assets between you without triggering a tax bill, so you can both make full use of your allowances.
Check whether you can afford to make regular gifts from income, which come out of your estate for inheritance tax purposes immediately.
Finally, think about making larger gifts that pass out of your estate for inheritance tax purposes after seven years. However, don’t be in a rush to give away too much, too soon, or you could face a shortfall later in life.
Sarah Coles: Head of Personal Finance
Sarah Coles is AJ Bell’s Head of Personal Finance. She’s passionate about helping people get to grips with their money, so they have more freedom to do the things that really matter to them in...
