Wealden Times | WT265 | June 2024 | Education Supplement inside

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Earn over £100k? Beware the ‘60% tax trap’
While 45% is the highest ‘official’ income tax rate in England, Wales and
Northern Ireland, the way the tax-free personal allowance is treated means that
some people pay an effective tax rate of 60% on some of their income.
Known as the ‘60% tax trap’, it applies to earnings between
£100,000 and £125,140. Here, we explain how the tax trap works
and why pensions could help you manage it.
Income tax and the personal allowance
Most people have a standard personal allowance of £12,570, which
is the amount of income you do not pay tax on each year. If you have
a standard personal allowance, the tax rates you’ll pay in each band
of earnings are as follows:
Band Taxable income Tax rate
Personal allowance Up to £12,570 0%
Basic rate £12,571 to £50,270 20%
Higher rate £50,271 to £125,140 40%
Additional rate Over £125,140 45%
Source: HMRC
Once you earn more than £100,000, your tax-free personal
allowance starts to be tapered. It reduces by £1 for every £2 that
your adjusted net income exceeds £100,000 and is zero if your
income is £125,140 or above.
Why the 60% tax trap occurs
Imagine you earn £110,000 – or £10,000 above the threshold.
You would not only pay £4,000 in higher rate tax on the £10,000,
but you’d also lose £5,000 of your personal allowance. And with
£5,000 of your personal allowance gone, that portion of your income
is now also subject to tax at 40%, costing you another £2,000. In
other words, of that £10,000, you’d only get to keep £4,000, which
equates to a 60% tax rate. For Scottish residents, the effective rate
of tax is even higher at 63%, as income in the higher rate tax band is
taxed at 42% in Scotland.
How to reinstate your personal
allowance
A way to mitigate the 60% tax trap is to save into a pension. If you
earn £110,000 and make a gross pension contribution of £10,000,
your adjusted net income falls to £100,000. This would reinstate your
full personal allowance and give an effective rate of tax relief of 60%
on your pension contribution. There is a cap on the amount you and
your employer can pay into your pension each year and still get tax
relief. For most people, this is 100% of your UK relevant earnings or
£60,000, whichever is lower (this might be tapered if your adjusted
income exceeds £260,000). If you exceed your annual allowance,
you’ll have to pay an annual allowance charge which essentially
claws back any tax relief received.
Next steps
Understanding how different tax rules might affect you isn’t easy,
especially as the rules can change frequently. A financial adviser can
help explain how the various rules affect your long-term financial
planning and help decide the best course of action for you.
We live and work local to you. We would be
delighted to help you and your family achieve
financial clarity and stability.
Graeme Hayden
Investment Manager
Divisional Director
E: graeme.hayden@brewin.co.uk
Evelyn Iriajen
Financial Advisor
Assistant Director
E: evelyn.iriajen@brewin.co.uk
RBC Brewin Dolphin, 16 Lonsdale Gardens,
Tunbridge Wells, TN1 1NU
T: 01892 739580
W: www.brewin.co.uk/royal-tunbridge-wells
The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute
tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.
Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this
document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services
Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office; 12 Smithfield Street, London, EC1A 9BD. Registered in
England and Wales company number: 2135876.
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