Navigating 60 Percent Tax - Caution for Higher Earners in the UK

Are you a higher-rate taxpayer in the UK? If so, be aware you might find yourself paying more tax than you anticipated. In this blog post, we delve into the complexities of the UK tax system and discuss how higher-rate taxpayers can unwittingly fall into the 60% tax trap.

Understanding the 60% Tax Trap

The 60% tax trap emerges due to the tapering of the personal allowance for individuals earning between £100,000 and £125,140. As income increases within this range, the personal allowance decreases, resulting in a higher effective tax rate. Surprising really, considering that the standard tax rates according to HMRC are 0%, 20%, 40%, or 45%. The rates are slightly different in Scotland, but a 60% tax band doesn’t seem to exist. 

This phenomenon is not widely known, and many wage earners in the higher spectrum may be unaware of the potential impact on their finances.

In practical terms, earning between £100,000 and £125,140 translates to a significant reduction in take-home pay. For every £100 of income in this range, only £40 remains in your pocket. This is due to a £40 deduction in Income Tax, coupled with an additional £20 lost through the tapering of the personal allowance, resulting in an effective 60% tax rate.  

Once you’re earning £125,140 or more, you don’t get any personal allowance at all. Not only that, but you’ll also be paying another 2% employee’s National Insurance contribution.

Mitigating the 60% Tax Trap

Optimising your taxable income can be achieved by contributing more to your pension before the tax year-end. This strategy offers a dual advantage: not only does it reduce your tax liability, but it also enhances your retirement savings.
Consider this scenario: You receive a £1,000 pay increase or bonus, pushing your taxable income to £101,000. By allocating that £1,000 to your pension fund before reaching the 60% tax zone, you not only sidestep higher taxation but also receive a 40% top-up on your contribution*, courtesy of pension tax relief.

It's worth noting that there's a yearly cap of £60,000 for pension contributions, allowing you to maximise tax relief while securing your financial future.

Alternatively, you might like to consider charitable donations. Making donations to a registered charity can also help reduce taxable income in the same way as making pension contributions.

Why Consultation with a Financial Adviser Matters

To avoid falling prey to the 60% tax trap, seeking advice from a financial adviser is crucial. A professional can help you understand the intricacies of the tax system, provide personalised guidance based on your financial situation, and ensure you pay what you owe – no more, and no less. Regular reviews with your financial adviser can keep you tax-smart and prevent unexpected financial setbacks.

Be aware, be informed, and take control of your financial wellbeing.

Contact us before the end of this tax year – Friday 5 April – to talk through the tax reliefs and allowances available to you.

The levels and bases of taxation, and reliefs from taxation, can change at any time.  The value of any tax relief is generally dependent on individual circumstances.

*Please note that anything over the basic rate of tax must be claimed via the individual's tax return.