Don’t fall into the 60% tax trap

60% tax trap
Feb
22
Posted 2021 by Chris Davies

It was the 2009 budget that saw the introduction of the personal allowance restriction (commenced in April 2010). As the UK emerged from the effects of the global financial crisis, increased taxes and spending cuts were the order of the day. That crisis may appear quite mild considering our current predicament.

The personal allowance restriction means that ‘higher earners’ see their personal allowance reduced by £1 for every £2 of income received above £100,000. This threshold has not changed since it was introduced. As such, this ‘fiscal drag’ has seen more people unwittingly paying increased taxes.

The personal allowance restriction results in an effective tax rate of 60% on income received between £100,000 and £125,000. Many taxpayers are unaware of this situation and it can be a particular issue for those on variable pay or those with fluctuating profits.

There are tax efficient ways to alleviate this problem. Firstly, you could consider a personal pension contribution. The gross contribution reduces total income for the purpose of the personal allowance restriction. A pension contribution is particularly effective. The combination of higher rate tax relief and reinstatement of the personal allowance provides a ‘relief’ rate of 60%.

Secondly, a Gift Aid donation will work in a similar way. Thus, giving the ability to bring total income below £100,000.

We would recommend reviewing your position before the current tax year ends (5th April 2021) to see if a saving can be made.

We are not authorised to provide pension or financial advice but would be very happy to advise on the tax position of a proposed pension contribution. 

If you would like to discuss the above or any other element of your personal tax affairs, then please get in touch via the ‘contact us’ form or call one of our offices.