Most believe that 45% is the highest rate. Actually, there is a quirk in the system that means that those with an income between £100k and £125k fall prey to a 60% tax rate!
The basic rules for the tax year 2019/20 are that on income up to £12,500 no tax will be payable because each individual is entitled to a Personal Allowance.
However, when your taxable income reaches £100k then for every £2 over that you lose £1 in Personal Allowances.
The higher rate threshold at which tax is charged at 40% also falls in step with the personal allowance, meaning that not only are you taxed at 40% on the additional £1, you also pay an extra 20% per £1 lost, resulting in the marginal rate of 60%.
If your income is, say, £101k then on the additional £1k you will lose £500 of your Personal Allowance and so you will effectively be paying a staggering £600 tax on that £1k (i.e. £1k at 40% plus £500 of lost allowances at 40%) equating to an overall rate of 60%.
This continues for taxable income up to £125k (£100k plus £12.5k x 2) at which point the whole of the Personal Allowance has been clawed back and the marginal Income Tax rate drops back to 40%.
This may seem complicated but for those in this bracket, it’s worthy of further consideration as there are steps which can be taken to mitigate the situation. The key is in considering your personal taxation position, seeking good advice and planning ahead.
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