Tax planning for entrepreneurs and high earners: Strategies to maximise your wealth

At Elite Financial we understand that for entrepreneurs and high earners, proactive tax planning is essential to preserve and grow your wealth. In this blog, we explore key strategies that can significantly reduce your tax liabilities and strengthen your financial position.

Pensions tax relief

Pension contributions remain one of the most effective ways to reduce your taxable income. You can contribute up to 100% of your earnings each tax year (capped at £60,000 for most people) and receive tax relief at your highest marginal income tax rate. For example, if you're a higher-rate taxpayer paying 40% tax, you get 40% relief on your contribution, so for every £1,000 you contribute, the net cost is just £600. Contributions made through salary sacrifice can also reduce your National Insurance liability, providing extra savings for both you and your business.

Annual allowance: The annual allowance is the total amount you can save into your pension each tax year before incurring a tax charge. For the 2025/26 tax year, the standard allowance is £60,000 if your income is below £200,000. However, for high earners, this allowance is 'tapered' if your 'adjusted income' (your total income plus pension contributions) exceeds £260,000, the annual allowance is reduced by £1 for every £2 of income above this level, down to a minimum of £10,000 when income exceeds £360,000.

For entrepreneurs, pension planning should be viewed in the wider context of business cash flow and exit planning. Making use of the full annual allowance or carrying forward unused allowances from the previous three years can be an effective way to shelter profits during successful years and enhance your long-term financial security.

Pension contributions for family members

Pension contributions for family members can provide a tax-efficient way to support your loved ones' financial future. You can contribute up to £2,880 annually into a pension for a spouse, partner, or child, even if they have little or no earnings and HMRC automatically tops up these contributions with basic rate tax relief of 20%. So, your £2,880 becomes £3,600 in their pension pot.

Over time, the effects of compound growth and tax-free investment returns can significantly enhance their retirement savings. Here is an example of what that could look like, assuming a compound growth of 6%:

Venture Capital Trusts (VCTs)

For high earners, pension contributions may be restricted due to the tapered Annual Allowance. In these cases, Venture Capital Trusts (VCTs) can offer a valuable alternative, providing attractive tax reliefs to those prepared to accept a higher level of investment risk.

Each tax year, you can invest up to £200,000 in new VCT shares and receive income tax relief at 30% of the amount invested, provided the shares are held for a minimum of five years. For example, a £50,000 VCT investment can reduce your income tax bill by £15,000 in that year.

After the initial five-year holding period, it's possible to reinvest the proceeds from matured VCT investments into new VCT shares. This reinvestment allows you to refresh your income tax relief and continue benefiting from tax-free dividend income. VCT dividends are completely free of income tax, and any gains from selling the shares are exempt from capital gains tax. This makes them an appealing option for entrepreneurs and high earners looking to diversify their investments in a tax-efficient way.

For entrepreneurs and high earners, VCTs can provide an additional layer of tax planning. They are particularly beneficial when you have maximised pension contributions and other tax planning strategies.

Inheritance Tax (IHT) planning

IHT planning is crucial for high earners and entrepreneurs, particularly as your business and personal wealth grow. The current IHT rate is 40% on estates above the nil-rate band, so proactive strategies can make a significant difference. Using annual gift allowances, lifetime exemptions, and trusts can help reduce the IHT burden on your estate. Investing in Business Relief-qualifying assets, such as certain shares in trading companies, can also provide 100% IHT relief.

Regularly reviewing your IHT position is essential, as family and business circumstances change. A carefully structured plan can protect your family's inheritance and ensure your wealth is passed on tax-efficiently.

Relevant Life Cover

Relevant Life Cover is a valuable tool for business owners and high earners, offering a tax-efficient way to provide death-in-service benefits for directors and key employees. It's a type of life insurance policy set up and paid for by the business, rather than by the individual. This means that premiums are treated as an allowable business expense, reducing the overall corporation tax bill.

One of the main advantages of Relevant Life Cover is its tax efficiency. The premiums aren't treated as a benefit in kind, so they're not subject to income tax or National Insurance for the employee. The payout is also generally free from income tax, capital gains tax, and inheritance tax, as long as it's held under a discretionary trust.

For entrepreneurs and high-earning professionals, Relevant Life Cover can be a smart way to ensure personal protection while minimising tax liabilities. It's particularly useful for owner-managers who want to provide for their family without eroding their personal income.

Elite Financial Accounting: Proactive planning for a secure future

Proactive tax planning can make a substantial difference in preserving your wealth and achieving your long-term goals. At Elite Financial Accounting, we specialise in supporting entrepreneurs and high earners with tailored tax strategies and advice that work for them.