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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. The dreaded (but unofficial) 60% tax rate. As soon as you start earning over £100,000, you gradually lose your £12,500 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

IncomeTax rate
Up to £12,5000%Personal allowance
£12,501 to £50,00020%Basic rate
£50,000 to £150,00040%Higher rate
over £150,00045%Additional rate

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 £125,000. 

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 over £150,000.

Sorry, explain that again?

It’s confusing. We know. 

Put simply, here’s an example:

  • I earn £100,000 and get a £1000 pay rise
  • The extra £1,000 is taxed at my normal 40% Higher Rate
  • But for every £2 I earn over £100,000, I also lose £1 of my tax-free Personal Allowance
  • At this 2:1 rate, I lose £500 of my Personal Allowance
  • This now also needs to be taxed at my 40% Higher Rate
  • 40% of £500 is an extra £200 tax
  •  I am now taxed £600 (£400 + £200) on the extra £1000 I earn
  • £600 is 60% of the extra £1000 I earn

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.
  2. Increase the amount you pay into your pension
  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.

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