60% Tax For Earnings Over £100k

It is very easy to analyse figures when there are different factors involved and to come up with an equivalent tax figure. This equivalent figure is basically classed as the amount of earnings you will lose in tax as your earnings increase over various levels. Not only do you take into account the actual tax you are paying but also any difference in tax paid at a lower rate.
In this example, if you are earning just over the £100,000 mark, your tax affairs become more complicated. The reason for this is because of the fact that once you reach the £100k earning threshhold, you start to lose your personal allowance, which is the amount you can earn that is not subject to any tax. For every £2 you earn over £100,000, you lose £1 of the personal allowance. This means that once you earn £116, 210, you no longer have any tax free personal allowance. So, in between these numbers you are caught in a virtual 60% tax trap.

To illustrate this I will show you some numbers:

Say you earn £100,000 a year. The tax you pay is as follows (using a simplified calculation not taking into account any other circumstances):

  • Personal allowance – £8105, zero tax
  • 20% tax for the next £34,370 of earnings = £6,874
  • 40% tax for the remaining £57,525 of earnings = £23,010

 Total Tax = £29,884, Net Income = £70,116

Now, let’s say you earn £110,000 a year. The tax is as follows:

  • Personal allowance (reduced to) £3,105 – zero tax
  • 20% tax on the next £34,370 of earnings = £6,874
  • 40% tax for the remaining £72,525 of earnings = £29,010

Total Tax = £35,884, Net Income = £74,116

So you will see that the increase in net earnings from a salary of £100k to that of £110k is only £4,000 – thus giving an equivalent tax rate on that tranche of earnings above £100,000 of 60%.

This 60% tax rate continues for earnings from £100,000 until all of the personal allowance is gone at £116,210.

So if your earnings are around this level you need to think carefully of ways to avoid this by making use of any tax efficient contributions you can make, for example to pension plans.


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