Do you earn between £100,000 and £125,140

Are you aware that anyone earning between £100,000 and £125,140 will into the 60% tax trap?

This is due to the impact of the personal allowance taper, which effectively creates a 60% tax rate for higher earners in the UK. Here’s a summary of the key points:

  1. Personal Allowance Taper: Individuals with incomes over £100,000 start losing their personal allowance at a rate of £1 for every £2 earned above this threshold. This leads to an effective tax rate of 60% on certain portions of their income.
  2. Tax Revenue Increase: The amount collected by the Treasury due to this 60% tax rate has risen significantly, reaching £4.7 billion in the 2022-23 fiscal year, up from £2.6 billion in 2018-19. Over the last five years, higher earners have contributed £18.6 billion in taxes due to this mechanism.
  3. Freeze on Personal Allowance: The personal allowance has been frozen at £12,570 since 2021 and is set to remain unchanged until 2028, leading to more individuals being impacted by the taper over time.
  4. Impact on Taxpayers: The freeze on allowances means more individuals face higher tax rates or start paying taxes for the first time, even if their incomes haven’t kept up with inflation. This is considered a stealth tax, as it’s not immediately obvious to taxpayers.
  5. Regional Distribution: London and the South East have the highest number of taxpayers earning over £100,000, accounting for half of six-figure earners in the country.
  6. Mitigation Strategies: Taxpayers can mitigate the impact of the 60% tax bracket by making pension contributions to bring their annual income below the £100,000 threshold.

Overall, the data highlights the significant impact of the personal allowance taper on higher earners and underscores the importance of tax planning strategies for individuals affected by this policy.

SJP.co.uk offers advise how to avoid the trap, and can be seen here.

 

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