Earning Over £100k? Avoid the 60% Tax Trap Before April 5th!

Are you earning over £100K? You might be unknowingly paying a 60% tax rate! As the tax year end approaches, it’s crucial to understand how your income impacts your tax liability and what you can do to minimize it. This blog post breaks down the “60% tax trap” and provides actionable steps to reduce your tax burden.

Understanding UK Income Tax Rates (2023-2024):

Here’s a quick overview of the current UK income tax bands:

While the table shows a maximum tax rate of 45%, earning over £100,000 introduces a hidden tax burden. Here’s why:
Effective 60% Tax Rate: This reduction effectively adds a 20% tax charge on top of the existing 40% higher rate, creating a 60% marginal tax rate in this income bracket.
Personal Allowance Reduction: For every £2 earned over £100,000, your personal allowance (£12,570) reduces by £1.
Capital Gains Tax: Rates will increase, and there will be stricter rules for agricultural and business property relief.
Inheritance Tax: Thresholds are frozen until 2030, and unused pension funds will be included in estates.
Stamp Duty Land Tax: The Higher Rates for Additional Dwellings surcharge will increase.

What Counts as Income?

Your total income for tax purposes includes:

• Holiday let/Airbnb profits
• Employment income
• Benefits in kind (company car, medical insurance, etc.)
• Bank interest (including foreign interest)
• Dividends from shares (taxed at specific dividend rates)
• Pension income (including State Pension and personal pensions)
• Self-employed profits
• Rental income

What Doesn’t Count as Income?

• Capital gains from property or share sales
• Inheritance

How to Reduce Your Tax Liability Before April 5th:

Maximize Pension Contributions:

Personal pension contributions reduce your adjusted net income.
This can help restore your personal allowance and avoid the 60% tax trap.
Consult a financial advisor for personalized advice.

Claim Work-Related Expenses:

Deduct eligible expenses (professional subscriptions, travel, mileage, subsistence) on your tax return.
This reduces your taxable income.

Utilize Gift Aid Donations:

Donations to registered charities can reduce your adjusted net income.
This can also help restore your personal allowance.

Free Childcare and the £100,000 Threshold:

Earning over £100,000 can also disqualify you from receiving free childcare hours.

Do You Need to File a Tax Return?

• If all your income is taxed at source (e.g., employment income) and you earn under £150,000, you might not need to file a return.
• However, filing a return is advisable if you have pension contributions, gift aid donations, or work-related expenses to claim.

Why File a Tax Return?

• Filing a tax return ensures you receive the correct tax relief.
• HMRC is not automatically aware of your pension contributions or gift aid donations.

Don’t miss out on potential tax savings! Contact RDG Accounting today for assistance with your tax planning and to ensure you’re not paying more than you should.

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