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 will also increase the threshold where your personal allowance begins to taper and can therefore provide Income Tax relief of up to 60% on pension contributions.
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, potentially offering Income Tax relief at a rate if 60%. Click here for more information.
Both of these strategies require you to have freely available cash as well as appropriate timing, so you need to bear this in mind before engaging in such strategies to take you out of the 60% tax band.