Exposing the 60% income 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%.