Oh No! I’m Going to Become a Higher-Rate Tax-Payer!

It’s January 2021. I’ve just been going over my accounts for the year and was shocked to find that at this rate I’m going to become a higher-rate tax-payer for the first time in my life.

My profits for the year are going to exceed the £50,000 limit for standard-rate tax-payers, which means anything I earn above that is going to be taxed at 40%.

In addition, this will also mean that I have to repay a portion of my partner’s child benefit through the High-Income Child Benefit Tax Charge.

Now, I am a law-abiding citizen and happy to pay my taxes. But only what I owe and if there are ways of reducing my legal obligation I feel it is my duty to look into them.

Staring at the figures and forecasting for the final two months of the tax year, it looks as though I am going to have earned around £58,000.

One highly-recommended option is to put the money into a pension. I don’t currently have a pension and, to be honest, I don’t really understand them. I believe you can put money into a pension before being taxed on it, however you’re still taxed when you take the money out. And I don’t like the thought of my money being locked away for the next 25 years or so.

The next obvious thing to do is look at reinvesting some money back into my business as expenditure, thereby reducing my profit.

This will mean foregoing my savings and investments for a couple of months and instead, use the money to increase the value of my business assets over the coming year. This is particularly difficult for me because I am, by nature, frugal and thrifty – the thought of spending money terrifies me.!

This weekend, I spent a few hundred quid on some business software I’ve been considering buying for some time. But this didn’t make much of a dent in my excess capital.

So finding things to spend my money on is becoming a bit of a nightmare. And, of course, I am restricted to purchases that can be considered business expenses.

Some ideas that I’ve had are:

  • A new laptop
  • A new mobile phone
  • Additional business software
  • Hiring freelancers to do some work for me
  • Buying small business websites

I’ve not quite decided exactly how I am going to do this. Or if if I am going to do this at all – maybe I should just pay the tax charge. However, I feel my frugal nature has held me back a bit from scaling up my business – I usually prefer to keep excess profits for myself rather than reinvest – so maybe this is an opportunity to take my business to the next level?