How to Maximise Tax Efficiency as a High Earner in 2025
This is a financial promotion and is intended to provide information, not investment advice.
For high-net-worth individuals (HNWIs) and sophisticated investors, navigating the intricacies of the UK tax system is essential for wealth preservation and growth. The higher your income, the more likely you are to face diminishing returns due to escalating income tax rates, withdrawal of personal allowances, and other tax burdens. With careful planning and the right financial tools, you can optimise your tax efficiency while staying compliant with HMRC regulations.
This guide explores tax strategies for high earners, focusing on how to mitigate the impact of higher income tax rates, utilise tax-efficient investment vehicles like the Innovative Finance ISA (IFISA), and make the most of your financial resources in 2025.
1. Understanding the Tax Challenges for High Earners
As your income rises, so does your exposure to higher tax rates and thresholds. For those earning over £100,000 annually, the challenges are particularly acute due to the phased withdrawal of the personal allowance.
The Effective 60% Tax Rate
For every £2 earned above £100,000, your personal allowance is reduced by £1. This creates an effective marginal tax rate of 60% on income between £100,000 and £125,140.
The Additional Rate Tax Band
For income over £125,140, the tax rate jumps to 45%. This additional tax burden makes it imperative for high earners to explore strategies that mitigate its impact.
Impact on Child Benefits and Pension Contributions
Higher earners may also face clawbacks on child benefit payments and reduced pension contribution allowances.
2. Leveraging ISAs for Tax-Free Growth
ISAs remain one of the most effective tools for achieving tax efficiency. For the 2025 tax year, the annual ISA allowance is £20,000, which can be split across different types of ISAs.
Cash ISAs
While Cash ISAs offer tax-free interest, the returns are often modest and may not outpace inflation. They are best suited for maintaining liquidity rather than long-term growth.
Stocks and Shares ISAs
These ISAs provide access to equity markets, offering higher growth potential. However, they come with market volatility risks that may not align with every investor’s risk tolerance.
Innovative Finance ISAs (IFISAs)
The IFISA bridges the gap between low-yield Cash ISAs and volatile Stocks and Shares ISAs. By investing in property-backed peer-to-peer (P2P) loans, an IFISA offers target returns of 5.4% to 7% (as of February 2025), providing tax-free income that outpaces inflation.
3. Maximise the Benefits of an IFISA
How an IFISA Works
An IFISA allows you to invest in P2P loans, where your capital is used to fund secured loans backed by UK property. The income generated is entirely tax-free, helping you keep more of your earnings.
Why an IFISA is Ideal for High Earners
1. Tax-Free Returns: Avoid paying income tax on interest earned, which is particularly beneficial for those in the 40% or 45% tax brackets.
2. Inflation-Beating Potential: With target returns significantly above inflation, an IFISA aims for that your money to grow in real terms.
3. Diversification: Adding an IFISA to your portfolio reduces reliance on equities or cash, balancing risk and reward.
Example
If you invest £20,000 in an easyMoney property-backed IFISA with a target return of 6.5%, you could earn £1,300 in tax-free income over the year. In contrast, the same return in a taxable account could result in a significantly lower net gain, depending on your tax bracket.
4. Pension Contributions: A Double Benefit
Tax Relief on Contributions
Pensions remain one of the most tax-efficient ways to save for retirement. Contributions up to the annual allowance (£60,000 in 2025, reduced for very high earners) attract tax relief at your highest marginal rate.
Reducing Taxable Income
Making pension contributions can bring your taxable income below key thresholds, such as the £100,000 level where the personal allowance starts to taper. This can save you money in both the short and long term.
Lifetime Allowance Considerations
Although the lifetime allowance has been abolished, it’s still essential to monitor your pension balance to ensure it aligns with your overall financial goals.
5. Charitable Donations: Do Good, Save Tax
Gift Aid
Donations made through Gift Aid allow charities to reclaim 25p for every £1 donated. For higher-rate taxpayers, you can claim additional relief by including these donations on your tax return.
Reducing Your Taxable Income
Charitable donations can lower your adjusted net income, helping you retain your personal allowance or reduce other tax liabilities.
6. Explore Salary Sacrifice Options
How Salary Sacrifice Works
By agreeing to exchange a portion of your salary for non-cash benefits (e.g., pension contributions, electric cars, or childcare vouchers), you can reduce your taxable income and national insurance contributions.
Benefits for High Earners
- Tax Efficiency: Reducing taxable income can help you avoid higher tax bands.
- Increased Pension Contributions: but note that contributions made via salary sacrifice do count towards your annual allowance.
7. Use Tax-Efficient Investments Beyond ISAs
Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)
These schemes offer tax reliefs of up to 30% (EIS) or 50% (SEIS) on investments in qualifying companies. Additionally, gains are exempt from capital gains tax if the shares are held for a minimum period.
Venture Capital Trusts (VCTs)
Investing in VCTs provides up to 30% income tax relief on investments up to £200,000 annually, alongside tax-free dividends.
Risks to Consider
While these schemes offer attractive tax benefits, they come with higher risks and less liquidity compared to ISAs or pensions.
8. Manage Capital Gains Tax (CGT)
Annual Exemption
The CGT annual exemption for 2024/25 is £3,000. By strategically realising gains within this limit, you can minimise your CGT liability.
Tax-Efficient Investments
Holding assets within an ISA or pension shields them from CGT. For taxable investments, consider transferring shares to your spouse to utilise both partners’ allowances.
9. Diversify Across Property-Backed Investments
Why Property Matters
Property-backed investments provide a tangible, stable asset class that can offer both income and growth. With easyMoney’s IFISA, you can enjoy monthly tax-free income while benefiting from the security of loans backed by UK property.
A Balanced Portfolio
Incorporating property-backed P2P loans into your investment strategy complements traditional assets like equities and bonds, enhancing diversification and resilience.
10. Stay Compliant and Informed
Work with Professionals
High earners should seek advice from tax advisors or financial planners to ensure compliance and maximise efficiency. This is particularly important when dealing with complex tax strategies or investments.
Monitor Legislative Changes
The UK tax landscape evolves regularly. Staying informed about changes to allowances, rates, and investment rules is crucial for maintaining an optimal financial strategy.
Conclusion: Take Control of Your Financial Future
Tax efficiency isn’t just about saving money - it’s about making your wealth work harder. By leveraging tools like ISAs, pensions, and salary sacrifice, while exploring property-backed investments like easyMoney’sIFISA, you can aim to minimise your tax burden and aim to maximise your returns.
With careful planning and the right strategies, high earners can navigate the complexities of the UK tax system and achieve long-term financial security. Start optimising your tax efficiency today and make the most of your hard-earned wealth.
Explore easyMoney’s property-backed IFISA to unlock tax-free returns and take the first step toward smarter investing.
Past performance is no guarantee for future results.
Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future.