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Earning Over £100k and Navigating the 60% Tax Rate: A Comprehensive Guide

Navigating the tax system can be quite challenging for those earning over £100k, especially when considering the 60% tax rate that applies to income above this threshold.

This comprehensive guide discusses the impact of this tax rate on your financial situation and explores various strategies to minimize its effect on your earnings.

Understanding the 60% Tax Rate

The 60% tax rate, also known as the “painful earnings point,” kicks in once your taxable income exceeds £100k.

This higher tax rate can have a significant impact on your take-home pay and savings, particularly when you factor in additional costs like interest rates and national insurance contributions.

To illustrate the effect of the 60% tax rate on your earnings, let’s consider an example: Suppose your annual income is £100,000, and you receive a £1,000 pay raise.

The additional £1,000 will be taxed at your standard 40% rate, but for every £2 earned over £100,000, you lose £1 of your personal allowance. Consequently, you’ll lose £500 of your personal allowance, which also needs to be taxed at 40%, resulting in an extra £200 tax.

In total, you’re taxed an additional £600 (£400 + £200) on your extra £1,000 of income, which equates to a 60% tax rate.

Seeking Financial Advice

Given these implications, it’s crucial to seek financial advice to help you navigate this tax bracket effectively.

One possible investment strategy to minimize your exposure to the 60% tax rate is to increase your pension contributions.

For example, if you earn £110,000 and contribute £10,000 to a personal pension, you will receive 40% tax relief on the contribution and have your full personal allowance reinstated.

Utilizing Gift Aid and Income Distribution

Another approach to minimize the impact of the 60% tax rate on your finances is to make a Gift Aid payment.

These donations are assumed to be made net of basic rate tax, effectively increasing your tax band by the amount of your personal Gift Aid payments.

If your income comprises other sources, such as property, dividend income from investments, or real estate investing, consider transferring these assets to a lower-earning spouse or partner.

This can help distribute the taxable income more evenly between both parties, potentially reducing the overall tax burden.

Exploring Investment Options

Exploring various investment options, such as stocks and shares ISAs, SEIS, EIS, or VCTs, can also help you minimize your exposure to high tax rates.

Additionally, ensuring you claim all allowable costs, such as professional subscriptions, uniform tax relief (if eligible), and tax relief on mileage, can help reduce your taxable income.

Changes to Tax Rates

Beginning April 2023, it’s worth noting that the tax rate for income over £150,000 will be set at 45%.

However, once your personal allowance has been eroded at £125,140, you will be taxed straight at the 45% rate (previously 40% up until £150,000).

Seeking Professional Financial Advice

Before implementing any of these strategies, it’s essential to seek professional financial advice to ensure they’re suitable for your specific situation.

Factors such as your risk tolerance, investment goals, and financial circumstances should be taken into consideration when deciding the best approach to managing your finances and investments.

Conclusion

In summary, if you earn over £100k, it’s crucial to develop a comprehensive investment strategy to minimize your exposure to the 60% tax rate.

By seeking professional financial advice, exploring various investment options, and optimizing your taxable income, you can make the most of your hard-earned money and generate income in a tax-efficient manner.

UPDATE- From April 2023 what changes?

It’s also worth noting that for now, income over £150,000 is taxed at 45%. However from April 2023, as soon as your personal allowance has been eroded, at £125,140, you will be taxed straight at the 45% rate (previously 40% up until £150,000).

Please seek advice in applying any of these before completing the above suggestions to ensure that these are relevant for you. Tax rates relevant as at January 2023 (they can change quickly).

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