The 60% Income Tax Trap
If you are earning between £100,000 & £122,000 in 2016/2017, you are effectively being taxed at 60% on the top £22,000 of your income! Over the next 3 years it is expected that about 1 million UK workers will be caught out by this Personal Allowance Trap.
The individual personal income tax allowance for 2016/2017 is £11,000. This is the amount you can earn before you pay any income tax. And the government has set a target for this to reach of £12,500 in coming years. This is good news as it means you will be able to earn even more before having to pay income tax.
However, once your earnings exceed £100,000 your personal allowance starts reducing by £1 for every £2 of adjusted net income. So once earnings reach £122,000 the allowance has gone completely. Consider these examples:
The additional income of £22,000 suffers additional income tax of £13,200. That’s a tax rate of 60%!
There are perfectly legitimate ways of mitigating this tax liability. The most effective is to make pension contributions as this has the effect of reducing your taxable income. In the example above if the individual makes a pension contribution of £22,000 gross he or she will receive tax relief of £13,200. That’s fantastic value for money!
If part of your remuneration is paid as bonuses by your employer it may also be possible to have some or all of the bonus paid as a pension contribution. This too will have the effect of reducing your income and may help you to avoid the 60% trap.
The new dividend allowance and personal savings allowance will certainly help to reduce your income tax liabilities. Make sure that you also take advantage of other tax-privileged savings such as ISAs to minimise your tax liabilities. Charitable donations may also be used to reduce your taxable income
If in doubt, take advice!
To discuss further or to arrange a face to face meeting please contact us.