One of the major tax implications for high earners is that you begin to lose your Personal Allowance if your ‘adjusted* net income’ is over £100,000— and the dreaded (but unofficial) 60% tax rate ‘kicks in’! Once your ‘Adjusted net income’ exceeds £100,000, you gradually start to lose your tax-free Personal Allowance (currently the first £12,570 of income received in tax year is tax free).
*N.B.// ‘Adjusted net income’ is defined as total taxable income before any Personal Allowances LESS certain tax reliefs such as ‘Gift-Aided’ donations made to charities; personal pension contributions; or trading losses.
HMRC may put you on a ‘0T’ tax code to try to ensure that the correct amount of PAYE is deducted on the payroll by your employer.
Income Tax rates currently charged on the following tax bands in UK:
Tax band Income range Tax rate
Personal allowance Up to £12,570 0%
Basic rate £12,571 to £50,270 20%
Higher rate £50,271 to £125,140 40%
Additional rate Over £125,140 45%
You’ll notice that the 60% effective tax rate is not mentioned in the above table. That’s because the 60% effective tax rate isn’t an official tax rate recognised by HMRC. Instead, it is a calculation of how much you effectively end up paying when your Personal Allowance is reduced. By losing your tax-free Personal Allowance; and effectively means that you generally pay an additional 20% tax on the slice of income you earn between £100,000 and £125,140 in addition to the usual higher rate tax (i.e. 40% + 20% = 60%).
For every £2 of ‘Adjusted net income’ over £100,000, you lose £1 of your Personal Allowance (https://www.gov.uk/income-tax-rates/income-over-100000), so as as soon as your ‘Adjusted net income’ exceeds £125,140 you lose your entire personal allowance for the relevant tax year!
You may wish to reduce your ‘Adjusted net income’ by making charitable donations or pension contributions during the relavent tax year in order to take you out of the 60% tax band or to reduce the impact thereof.
Feel free to contact us if you need assistance in reducing your tax payable or simply to complete your tax return for you! Contact us now for your free initial consultation and tax review.