Five ways for higher rate taxpayers to reduce their tax bill
By Boring Money
26 Mar, 2025
With thresholds frozen, more people than ever are paying higher rate tax - and without necessarily being any wealthier. The Institute for Fiscal Studies recently found that 2.5m more people will pay higher and additional rates of income tax by 2027. As many as one in five taxpayers will fall into these higher rate brackets, at a time when mortgage costs and household bills are at their highest in years. With this in mind, even higher rate taxpayers need to watch the pennies. We asked a series of experts for their top tips on how to reduce your tax bill (legitimately – no offshore accounts here!). These are their ideas.
1. Top up a pension
The original and still the best, topping up a pension was recommended by every adviser we asked. The key is the tax credits, which give investors a 40% or 45% head-start.
Topping up your pension will not only help you reach your retirement goals, but it also comes with significant tax advantages. Each year you can pay in up to 100% of your earnings, capped at £60,000 in the 2025-26 tax year, and you can also carry forward any unused pension annual allowance from the previous three tax years.
For relief at source schemes, you automatically receive 20% uplift on contributions in the form of government tax relief, and if you are a higher rate or additional rate taxpayer, you can claim a further 20% or 25%, respectively, via your tax return. This could result in an Income Tax saving of up to 45%.
Another often overlooked advantage to pension contributions is that they may bring your overall earnings lower. This is an advantage for those who want to claim Child Benefit.
If your pension contributions bring you below the threshold of £60,000, you could see your Child Benefit eligibility reinstated. The same is true if you earn enough to tip you into the 45% tax threshold - by making pension contributions, you can reduce your earnings below the limit and reduce the amount of tax you need to pay.
2. Plan as a couple
In the Shawshank Redemption, Andy Dufresne famously wins the prison guard’s trust by encouraging him to transfer assets into his wife’s name. Ultimately, it works better for Dufresne than for the prison guard, but that shouldn’t be a deterrent for most married couples.
If you’re married or in a civil partnership, you can transfer cash or investments into their name without any tax consequences so that you can both take advantage of your tax-free allowances. If they pay Income Tax at a lower rate you can also save tax. For example, a higher rate taxpayer transferring cash savings to a basic rate taxpaying spouse will save £200 in tax for every £1,000 of interest.
For this to work, you need either your spouse to be in a lower tax bracket than you or for them to have tax-free limits remaining that they aren’t using, such as the Personal Savings Allowance or their ISA allowance (or both).
For example, if you have investments that produce income that you’re paying dividend tax on, you could transfer them to your spouse. Ideally, they could put them in their ISA, if they have any of their annual limit left and then no tax is due on them.
Alternatively, even if they do pay tax on the assets, it will be at a lower tax rate. No Capital Gains Tax would be due on the transfer, as spouse transfers are exempt. A similar approach works for cash savings if you’ve breached your Personal Savings Allowance.
3. ISAs are nicer
ISAs are a no-brainer. They cost nothing, can accommodate most types of investment and have a chunky £20,000 annual allowance. Suter points out that a couple can shelter £40,000 a year from HMRC:
They can withdraw the income they get paid from their investments entirely tax-free, as well as taking lump sums to provide an income, tax-free. For example, someone with a £100,000 ISA that generates 5% income, can earn £5,000 a year with no tax to pay.
The £20,000 allowance resets each tax year, and it’s a case of ‘use it or lose it’ as it does not carry forward into the next tax year! Morrissey says the under-40s should look at Lifetime ISAs, launched with much fanfare in 2017, but now often a forgotten part of the investment planning mix.
LISAs can act as a great addition to pensions for retirement planning as each contribution up to £4,000 a year benefits from a 25% government bonus and there is no bearing on pension allowances. Alternatively, LISAs can be used to help fund a first home.
Investors can take out a LISA between the ages of 18 and 40 and, once in place, they can contribute until they are 50. The 25% bonus is a significant uplift to their savings, which over time and added to long-term investment growth could see them accumulate a tidy sum.
4. EISs and VCTs
For investors who are willing to take a risk on early-stage companies, there are considerable tax incentives available. Enterprise Investment Schemes (EISs) and Venture Capital Trusts (VCTs) can have a real impact on tax bills, but investors need to be willing to remain invested for three to five years and willing to take a risk on their capital.
Enterprise Investment Schemes (EISs)
For high earners who want to maximise tax relief and have an Inheritance Tax benefit, Enterprise Investment Schemes could be the solution. These schemes offer several generous tax benefits to incentivise investors to back promising UK early-stage with the finance they need to grow to achieve commercial and financial success – and all for the greater good of the UK economy.
There are some chunky tax reliefs on offer, including Income Tax relief of 30% on investments of up to £1m. This means that for every £100 invested in an EIS scheme, investors can claim £30 back in Income Tax.
There are no capital gains to pay either and EIS shares also qualify for Business Relief, which means that they can be left to beneficiaries free of Inheritance Tax, as long as they have been held for at least two years at the time of death.
Venture Capital Trusts (VCTs)
If you pay the full £20,000 into your ISA this year and have more to invest - or if you are facing a hefty tax bill you’d like to reduce - you might want to consider investing in a Venture Capital Trust (VCT).
VCTs are a type of investment trust which invest in smaller, fast-growing UK companies. These companies are early stage and so carry risk. To encourage investment, the government offers VCT investors generous tax reliefs – including 30% Income Tax relief upfront and tax-free dividends. With tax thresholds frozen and dividend allowances coming down, these trusts will become increasingly appealing to more affluent investors.
The rules say you have to remain invested for at least five years if you want to qualify for tax relief, so they are for people who can afford to set this money aside, and who have sufficient rainy day funds and income from other sources.
The combination of higher risk and longer investment horizons means VCTs tend to be more popular among more experienced investors who already have a conventional investment portfolio. They are able to take the increased risk and able to tie money up for an extended period. They’re also more likely to have a sizeable Income Tax bill to offset – so benefit most from a VCT’s tax-saving side effects.
However, VCTs are at the spicy end of the spectrum and so investors should be aware of both the long-term nature of these investments, as well as the inevitable risk which comes with earlier stage businesses. They're not as easy to buy and sell as other investments, so see if your platform facilitates this and be prepared for some paperwork initially.
Investments into VCTs are Capital Gains Tax free and Income Tax relief is available of up to 30% of the amount you put in – which can reduce your overall tax bill. You have to hold the investment for five years to keep the Income Tax relief.
5. Give money to charity
It turns out you can be altruistic and tax savvy at the same time. Suter points out that by donating money using Gift Aid, the charity will get a boost to any money donated by claiming back the tax due. For every £1 donated, the charity can claim back 25p, but higher rate taxpayers can also claim money back through their tax returns.
You will get 20% tax relief on the full donation. So if you donate £100, and the charity gets £25 back through tax relief, then a higher rate taxpayer can get back 20% of the £125, which equals £25. This effectively works by increasing your basic rate tax band by the amount you donate. So if you donate £1,000, the basic rate tax threshold will increase from £50,270 to £51,270 in the current tax year.
More and more people will be drawn into the higher rate tax net over the next few years, so it will become increasingly important to look at legitimate ways to mitigate your tax bills. In general, the solutions are complicated and are widely available. You just have to know where to look.
