Introduction
It’s often thought that the highest UK tax rate is 45% – but that’s not the case.
If you earn more than £100,000 per year, you could be taxed at a rate of 60% on income between £100,000 and £125,140.
Here’s how it works
If you receive income of £100,000 or more, the rate of Income Tax you pay will be impacted by the gradual removal of the £12,570 Personal Allowance (the amount of income you can receive each year without paying Income Tax). The personal allowance is currently tapered away at a rate of £1 for every £2 of income above £100,000.
Once your income is over £125,140, you don’t benefit from any tax-free Personal Allowance whatsoever.
Here’s an example
Let’s say your salary has increased from £100,000 to £110,000. Here’s how the extra £10,000 would be taxed:
£4,000 – the standard 40% rate of Income Tax for a higher rate taxpayer
Plus £2,000 – the additional Income Tax as the personal allowance is reduced by £5,000
That’s a total Income Tax liability of £6,000 on your £10,000 pay rise – or 60%.
Considerations to mitigating this 60% effective tax rate
Contributing more to your pension before the end of the tax year is an efficient strategy to lower your taxable income and avoid exceeding the threshold. This approach offers dual benefits: it decreases your tax liability and enhances your retirement savings concurrently.
Consider this scenario: receiving a bonus or pay increase of £10,000 raises your taxable income to £110,000. By using this to make a £10,000 pension contribution you avoid falling into the 60% tax bracket and so both restore your personal allowance and obtain higher rate relief on the contribution.
It’s worth noting that there’s an annual limit on pension contributions that qualify for tax relief, which is typically the lower of £60,000 or your annual earnings. For higher earners, your pension annual allowance might be tapered down further.
What next?
If you would like to discuss how we can help you mitigate Income Tax liabilities, reach out to one of our experts who can discuss with you your individual requirements.
The levels and bases of taxation, and reliefs from taxation, can change at any time, and are generally dependent on individual circumstances.
The basic rate of tax relief of 20% is automatically applied to pension contributions. You must complete a Self Assessment tax return to claim additional rates of tax relief.
Should you require more information or have particular questions, we invite you to contact us at your convenience.
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Hugh Vernon
Private Wealth Adviser
