Don’t get caught in the 60% tax trap!
Did you know, if you earn £100,000 or over, your £12,570 personal tax allowance is tapered away at a rate of £1 for every £2 you earn above £100,000. Once income exceeds £125,140 you lose the full allowance, with an effective tax rate of 60%. This rises to 62% if you contribute via Salary Exchange as you also save the National Insurance.
How to avoid the tax trap
You may feel comfortable with paying more tax than you need to, but if you would prefer not to do that, there’s almost always some action you can take to avoid or reduce the impact of the 60% tax trap.
The main option is if you are close to moving into a higher threshold, the quickest and simplest way to reduce this proportional tax rate is to look at putting more into your pension to reduce the earnings that fall into that bracket,
For example, let’s say you get a £1,000 pay rise that takes your taxable income to £101,000. Not only does paying that £1,000 into your pension take you back out of the 60% zone, but you benefit from the 40% higher-rate tax relief available on that contribution, which could also be topped up by your employer’s contributions.
I am an Independent Financial and Mortgage Adviser and have worked in Financial Services for over 12 years. During my career I gained experience in assisting both individual and corporate clients.…
