Are you being taxed at 60%?
Did you know that there is a band of income, between £100,000 and £125,140, when your income is taxed at 60%.
If your income for the current tax year looks as if it will fall into this band (£100,000 to £125,140) it makes sense to investigate ways to minimise this excessive tax charge. In the notes below we take a look at how the 60% rate occurs, and ideas to reduce your taxable income to minimise the 60% charge.
Why is your income taxed at 60%?
In this band (£100,000 to £125,140), not only are you paying the 40% higher rate of income tax, but for every extra £2 earned over £100,000 you will lose £1 of your tax-free personal allowance. In effect, you will be taxed on an additional £1 that would have otherwise been tax-free.
The result is that for every £2 of income earned in this range, you pay 40% tax on that £2 (so £0.80), and also an additional 40% on the £1 you lose from your personal allowance (another £0.40). So, effectively, you’re paying £1.20 in tax on £2 of extra income, or 60%.
This process means that once your taxable income exceeds £125,140 you will no longer have a personal tax allowance.
Ideas to minimise this loss of personal allowance
The only way to avoid this loss of allowance is to reduce your taxable income. You could consider a number of options but please consult your professional advisors before taking any action. For example:
- Make pension contributions.
- Make charitable donations (Gift Aid).
- Consider a salary sacrifice arrangement with your employer. Would need to be for non-cash benefits such as employer pension contributions.
- If part of your income is from investments (dividends, rental income, interest) you could consider transferring these investments to your spouse.
- Switch investments into tax efficient products such as ISAs.
- If this year’s bonus is the item pushing your income over £100,000 could you defer receipt of the bonus until the following tax year when your overall income might be lower.
Planning to avoid this reduction in tax allowance is critical.
If you find yourself being taxed at 60% and in this tax bracket please call us on 020 7870 9050 or contact us and we can help consider your options. The time to take a look is now, while we have time to plan, and then act before the end of the current tax year, 5 April 2025.
