If you earn over £100,000 per year, you should be very careful about suffering from yet another “tax-trap”, known as “The Tapered Personal Allowance”.
For instance, on an income of between £100,000 and £125,140 you will actually the equivalent of a 60% tax rate! And here is us thinking work always pays!
How does it work?
If you are resident in the UK for income tax purposes, you will have an amount of money you can earn every year and not pay any tax on it. For the 2023/24 tax year this is set as £12,570 and is known as your “personal allowance”.
If you earn more than £100,000 in any given tax year (remember this is between 6th April to 5th April every year) then your personal allowance is “tapered” or reduced by £1 for every £2 you are over £100,000. This means that by the time your taxable income is £125,140 you have lost your personal allowance in full.
What income is used in the calculation?
This is known as “taxable income”. It includes:
- Taxable income from employment, including any taxable company benefits such as company cars, private healthcare for example)
- Taxable profits form self-employment
- Interest, dividends and rental income received
- Any pension income received
- Income from a trust
- Some state benefits
You can then deduct the following from the total:
- Pension contributions (gross value)
- Trading losses
- Gift aid (gross value)
If the total is below £100,000 = no tax charge. If over then self-assessment will be required and a tax charge will need to be paid.
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How to avoid the tax charge?
Top up a pension. Any payments made to a pension will effectively reduce your taxable income! Also, any payments to a recognised charity made with “Gift Aid” will also reduce your taxable income. If your employer can and will, you could consider using “salary sacrifice” to pay for any additional benefits.
Where the higher earner holds income producing investments or receives the rental income from property for example, could this be shifted to the lower earning spouse? Where profits from self-employment or dividend income from a business, again could this be shifted across?
Finally – In our opinion another very unfair “tax-trap”
If you work out the tax due on the income between £100,000 and £125,140 it actually works out to be a WHOPPING 62%, in other words almost two-thirds of your income (40% tax rate, a further 20% due to loss of personal allowance and 2% national insurance).
On income above £125,140 you drop back to the 45% tax bracket, meaning from a PAYE paid role, the highest rate of tax you would pay is 47% (45% tax and 2% NI).
Why is it that this narrow set of people end up paying so much? OBR statistics (March 2023) state, they expect a further 900,000 or so tax-payers will be brought into this bracket in the coming tax year or so!
