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Last updated: 19 Apr 2021
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Exposing the 60% income tax rate

Although it is commonly thought that the highest UK Income Tax rate is 45%, there is a quirk in the system which means that UK taxpayers with income between £100,000–£125,000 (2019/20 rates) fall prey to a 60% tax rate.

Most UK taxpayers are entitled to a part of their income tax—free, in other words a personal allowance, which for 2021/22 is £12,570. However, if you have an annual income exceeding £100,000, you lose £1 of your personal allowance for every £2 of income above £100,000. 

The higher rate threshold at which tax is charged at 40% also falls in step with the personal allowance, meaning that not only are you taxed at 40% on the additional £2 of income, you also pay an extra 40% on the £1 of personal allowance lost, resulting in the marginal rate of 60%. This continues up to £125,140 (£100,000 + (£12,570 x 2) ), at which point your entire personal allowance has been lost and the marginal Income Tax rate drops back to 40%.

To provide an example, take Mike, an individual with total income of £120,000 in 2021/22. As he earns £20,000 over £100,000, he loses £10,000 of his personal allowance (£1 of personal allowance for every £2 of income over £100,000), leaving only £2,570 of personal allowance.

This £10,000 of extra taxable income (at 40%) means that Mike pays £4,000 more Income Tax on top of the £8,000 due on the £20,000 income in excess of the £100,000 threshold. Therefore, the £12,000 Income Tax as a result of the extra £20,000 income gives an effective tax rate of 60%.

About the author

David Conway

+44 (0)207 710 0363
conwayd@buzzacott.co.uk

Most UK taxpayers are entitled to a part of their income tax—free, in other words a personal allowance, which for 2021/22 is £12,570. However, if you have an annual income exceeding £100,000, you lose £1 of your personal allowance for every £2 of income above £100,000. 

The higher rate threshold at which tax is charged at 40% also falls in step with the personal allowance, meaning that not only are you taxed at 40% on the additional £2 of income, you also pay an extra 40% on the £1 of personal allowance lost, resulting in the marginal rate of 60%. This continues up to £125,140 (£100,000 + (£12,570 x 2) ), at which point your entire personal allowance has been lost and the marginal Income Tax rate drops back to 40%.

To provide an example, take Mike, an individual with total income of £120,000 in 2021/22. As he earns £20,000 over £100,000, he loses £10,000 of his personal allowance (£1 of personal allowance for every £2 of income over £100,000), leaving only £2,570 of personal allowance.

This £10,000 of extra taxable income (at 40%) means that Mike pays £4,000 more Income Tax on top of the £8,000 due on the £20,000 income in excess of the £100,000 threshold. Therefore, the £12,000 Income Tax as a result of the extra £20,000 income gives an effective tax rate of 60%.

What should you do?

What should you do?

You may be at particular risk of the 60% tax rate if you earn variable employment bonuses which are paid towards the end of the tax year and push your total annual income above £100,000, or if you’re a trader with fluctuating profits. Clearly, the 60% rate is a punitive result, but there are some tax-efficient strategies available to alleviate it.

Make personal pension contributions

Pension contributions to Self-Invested Personal Pensions (SIPPs) are treated as being paid net of basic rate tax and increase the basic rate band by 20% of the grossed-up amount (this does not include those paid under salary sacrifice or employer contributions). This can serve to counteract the fall in the higher rate threshold triggered by the loss of the personal allowance.

Make charitable donations under Gift Aid

These are treated in a comparable way to pension contributions whereby the basic rate band is extended by 20% of the grossed up contributions. Click here for more information.

However, both of these strategies require you to have freely available cash, so you need to bear this in mind before engaging in such strategies to take you out of the 60% tax band.

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