Tax year end tips for six-figure earners

Hands up who earns £100,000 or more and feels well off? Rather surprisingly, according to new research, only one arm in 10 will be held aloft.

These were the stark findings from HSBC Premier’s report titled, Your Money's Worth: Defining Wealth in 2025, and they certainly raise some eyebrows. A six-figure salary puts you in the top 4% of earners and is almost three times the average wage.

• Invest with ii: Open a Stocks & Shares ISA | What is a Stocks & Shares ISA? | ISA Offers & Cashback

As the report notes, there is, to some degree, a perception gap here. Which part of the country you live in also has a bearing – some areas are pricier than others. But there are other aspects at play, too.

Lifestyle creep – where increased spending absorbs rising wages – is an obvious one. It’s natural to upgrade your lifestyle as earnings tick up, whether that’s more or nicer holidays, a bigger home, or privately educating children.

Another factor is tax. The UK’s progressive tax system means that as your pay increases over time, you’ll likely trip into higher bands, meaning you keep less of this portion of income.

For every £1 that falls in the basic-rate tax band, you lose 28p to income tax and national insurance (NI), 42p on anything in the higher rate, and 47p on anything above £125,140. There are also some painful tax traps to watch out for.

A household where two people earn £50,000 will take home £10,000 a year more than one with a single income of £100,000.

Successive governments’ decisions to freeze income tax thresholds are nudging more people into the upper tax thresholds. As such, protecting your wealth and income from HMRC’s mitts has never needed more focus. The UK’s tax burden was already at a 70-year high before Chancellor Rachel Reeves delivered £40 billion in hikes at the Autumn Budget.

For anyone earning £100k or more, there are some key things to consider. Let’s explore these and offer tips on what you can do to keep the taxman at arm’s length with 5 April approaching.

Swerve the 60% tax trap

Once your income trips into six figures, a rather nasty tax trap lies in wait.

For every £2 you earn above £100,000, your £12,570 personal tax-free allowance reduces by £1, vanishing once income hits £125,140. The combination of lost or reduced personal allowance and 40% income tax creates a punishing 60% effective rate. Once you factor in national insurance (NI), it rises to 62%.

This is impacting more and more people. According to a freedom of information request in December by the Financial Times, in the 2023-24 financial year, 634,000 taxpayers were estimated to land in the 60% tax trap – a massive 45% jump in just two years.

The trick to keeping your personal allowance is to lower your income. This may sound counterintuitive, given if you earn more, you take home more.

• How the great wealth transfer could accelerate in 2025
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

However, there are ways to reduce your income, without reducing your overall wealth. In contrast, you can improve it. You just need to be happy to park that portion away for later life.

One savvy option involves paying more into your pension, as it brings down what’s called your adjusted net income. For instance, if you earn £110,000 and pay £8,000 in total into pensions (boosted to £10,000 with basic-rate tax relief), your net income will fall to £100,000.

The upshot here is that you get to keep your personal income allowance, save 40% income tax, and give you retirement savings an uplift. What’s more, any investment growth is tax free. Just make sure you’re happy to lose access to the money until age 55 (rising to 57 in 2028) at the earliest.

This includes all personal pension contributions, including those made through your workplace. There is, however, plenty of scope here. Most people can pay up to £60,000 into a pension every year and get tax relief at their marginal rate. Just don’t forget to stick your pension contributions on your tax return.

If you’re employed, an even more tax-efficient tactic is called salary sacrifice. This is where you exchange a portion of your income for an equivalent pension payment. The additional benefit here is that you’ll save NI too, which, if you earn six figures, will trim an extra 2% off your tax bill.

Be mindful of tax on your bonus

We’re now waist-deep into bonus season - great for anyone whose employer has dished out generous rewards this year.

But a tidy bonus can create an unwanted tax bill, especially if it falls into the 40% or 45% bracket or perhaps pushes you into the 60% tax trap.

Naturally, you may want to spend and enjoy some of it now. However, if you’re happy to tie some of the money up until age 55 (rising to 57 in 2028), some employers may allow you to exchange your bonus for a pension payment.

Childcare cliff edge

For parents with young children, tripping into six figures can bring further financial pain.

Every parent in the UK gets 15 hours of free childcare for three and four-year-olds, regardless of their income.

But once earnings reach £100,000, eligibility for 30 hours of free childcare ceases. And unlike the 60% tax trap, a cliff edge is imposed rather than a taper. Simply earning an extra £1 could result in 15 hours of lost childcare, potentially worth up to £3,000 a year.

• Four great reasons to invest in a Junior ISA by 5 April
• The teenagers on track to become ISA millionaires

Once again, pensions are your friend here. They offer all the tax advantages outlined above and can enable you to keep valuable childcare if you contribute enough to reduce your adjusted net income below £100,000.

Watch out for the taper

The tapered pension annual allowance doesn’t affect many people but is an inconvenience for those impacted. The way this works is that every £2 of income above £260,000 reduces your £60,000 annual allowance by £1. The taper halts at £10,000 when income reaches £360,000.

You may, however, be able to pay in more and still get tax relief. Carry-forward rules allow you to use any unused annual allowance from the previous three tax years. To qualify, you needed to have been a member of a registered pension during each of the years in question.

So, let’s say you’re impacted by the taper, which has dwindled your annual allowance to £10,000. If you haven’t made any pension contributions in since the 2021-22 financial year, you could potentially pay £28,000 into a pension (between 2021 and 2023 the minimum taper was £4,000) by 5 April and get 45% tax relief.

A note of caution - things can get quite complicated, as any employer pension contributions, including defined benefit (DB) pension increases, are factored into the calculation. Therefore, it’s important to seek regulated financial advice to make sure you’re doing the right thing.

Use ISAs to keep your gains, dividends and interest

Those earning £100,000 won’t just pay more tax on salaries, bonuses and self-employed profits. HMRC can also grab bigger chunks of investment gains, dividends and savings interest.

Higher earners pay 24% on capital gains instead of 18%, while dividend tax is split into three tiers: 8.75% at the basic rate (below £50,270), 33.75% at the higher rate (between £50,271 and £125,140) and anything above is taxed at 39.35%.

Savings interest is taxed at the same rates as income, hitting bigger earners the hardest. And as your earnings increase, there’s a further catch. The savings allowance, the interest you can earn every year tax free, falls from £1,000 to £500 once income exceeds £50,270. What’s more, earn more than £125,140 and your allowance disappears. You pay tax on all savings interest.

• ISA ideas: experts name a dozen funds that consistently deliver
• Where pro fund buyers are investing their ISAs in 2025

Wrapping your savings and investments in individual savings accounts (ISA) can protect you here. You can save and invest up to £20,000 in ISAs every year and pay no tax on gains, dividends, and interest. As the ISA allowance resets on 6 April, you could tuck away £40,000 in the next few weeks.

If this still leaves you with some extra cash in savings, there are still some things that higher earners can do to reduce tax.

You can hold up to £50,000 in Premium Bonds and any prizes you win are tax free. The drawbacks are that prizes aren’t guaranteed, and the prize rate has fallen to 3.8% recently in response to lower interest rates, reducing the odds of winning.

Use your tax-free allowances

For shareholdings outside tax wrappers, there are a couple of handy allowances at your disposal.

The CGT exemption protects the first £3,000 of gains from tax. This allowance has been hacked away at in recent years, and may not seem a significant sum, especially if you have a sizeable portfolio. But using it every year, where possible, can avoid a bigger bill down the line, especially as CGT rates were hiked in October. And if you don’t use it, you can’t roll it over to future years.

Shifting the money into your ISA, provided you have some allowance spare, can protect future growth or income from HMRC. This is a savvy trick called Bed & ISA. If you’re looking to do this before 5 April, you may need to act quickly as it can take providers a few weeks to process Bed & ISA instructions.

• Could ‘Bed & ISA’ spare you a hefty tax bill?
• How will the Autumn Budget affect tax year end 2025?

When it comes to dividends, the first £500 you receive every year are tax free. Like the CGT exemption, this allowance has also seen swingeing cuts in recent years.

Joint approach

For those married or in a civil partnership, some canny manoeuvring, while it may seem a chore, can trim some precious pounds from your tax bill – especially if one spouse is in a lower tax bracket.

Your ISA and pension allowances double up, while you also each get a CGT exemption and dividend allowance. The good news is, transferring assets between spouses incurs no CGT.

Beyond this, allocating a bigger proportion of your investments to a lower tax-paying spouse can could attract 8.75% on dividends instead of 33.75% or 39.35% - a significant saving.

The same applies to any cash savings. If one spouse or civil partner is in a lower tax bracket, stashing savings in their name can enable you to keep more interest. This is particularly prudent if you earn above £125,140 and lose your saving allowance, as the taxman will grab 45p in every pound of interest you earn. As noted above, a basic-rate taxpayer can earn £1,000 in interest tax free, and anything above is taxed at just 20%.