What are the tax implications of earning over £100K?

One of the major tax implications of earning over £100k is that you start losing your Personal Allowance. And the dreaded (but unofficial) 60% tax rate. As soon as you start earning over £100,000, you gradually lose your £12,570 tax-free Personal Allowance, pound by pound.  

Also important to remember is that you will have to do a tax return. HMRC will check what’s known as your Adjusted net income when you do this, to work out whether you owe money or are due a refund based on your £100,000k+ salary.

How does it work?  

To understand the 60% tax rate, you should first understand the way that income is taxed in general in the UK. 

Income Tax is currently charged at the following rates, although this is subject to change depending on the Chancellor’s vision at the time of each Autumn Budget.

You’ll notice in the above table that the 60% tax isn’t mentioned. That’s because it isn’t an official tax band recognised by HMRC. It’s instead a calculation of how much you end up paying when your Personal Allowance is deducted. By losing the allowance, it adds an extra 20% of tax onto the income you earn between £100,000 and £125,140. 

For every £2 that you earn over £100,000, you lose £1 of your Personal Allowance. You also won’t be eligible for 45% tax until you earn a higher income over £125,141.

Sorry, explain that again?

It’s confusing. We know. 

Put simply, here’s an example:

Now, if you’re a visual learner, we’ve obviously got you. This image will help break down Income Tax and what it means for higher salaries.

Alternatives to the tax implications of earning over £100k

Whatever tax you’re liable to pay, you will have to pay by law. That said, there are ways to be more tax efficient. 

Here’s a selection of things that you can do to improve your tax efficiency, avoiding the 60% tax trap:

1. Instead of your pay rise, take non-cash employee benefits such as a company car, private health insurance etc. through a salary sacrifice scheme
2. Increase your pension contributions.
3. Donate to charity and claim the Gift Aid tax relief
4. Look for tax efficient investments.

For more information, take a look at this article about ways that you can be tax efficient when you earn over £100,000.