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Last updated: 24 Oct 2023

Exposing the hidden 60% Income Tax rate

It's most people's understanding that the highest UK Income Tax rate is currently 45%. However, there's a quirk in the system which means that if your annual income falls between £100,000 - £125,140 (2023/24), you're likely to fall prey to the 60% marginal rate.

Most UK taxpayers are entitled to receive a part of their income tax-free, in other words the personal allowance, which for 2023/24 is £12,570. However, once your annual income exceeds £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 will 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 additional threshold begins so the Income Tax rate from then onwards is 45%.

To provide an example, let’s say that during 2023/24, you have total income of £120,000. As your income exceeds £100,000 by £20,000, you will lose £10,000 of the personal allowance (£1 of personal allowance for every £2 of income over £100,000), leaving only £2,570 of the personal allowance to be relieved against your income.

This £10,000 of extra taxable income (at 40%) due to the loss of the personal allowance means that you would pay £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 Income Tax rate of 60%.

About the author

Richard Pott

+44 (0)20 7556 1295
pottr@buzzacott.co.uk
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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.

How we can help

Our tax and financial planning experts work together to arrive at solutions that not only provide options to minimise the tax payable, but also consider your future financial needs. This can focus on pension planning but can also cover your wider investments. As experienced advisers, we can provide advice and guidance tailored to your specific circumstances.

Get in touch

For professional tax advice or financial planning tailored to your unique circumstances, please fill out the form below and one of our specialists will be in touch to discuss your requirements and how we can help.