News & Views Tax Planning 60% Income Tax
Here’s Your 60%, Mr Chancellor!Have you started paying 60% income tax on some of your earnings?Are you aware you could have already started paying 60% income tax on some of your earnings since April this year? There has been a great deal of publicity about the new 50% tax band affecting those earning over £150,000…but you could be paying a higher income tax rate than this on a lower income. The devil is in the detail, but the rather sneaky way this tax can bite you is by reducing the personal allowance of anyone earning over £100,000 at a rate of £1 for every £2 of earnings over £100,000 until it is effectively completely withdrawn. The current personal allowance (the starting band of your income on which no tax is normally charged) is £6,475, although the Government has stated it aims to raise this to £10,000 over the life of this Parliament. Let's say you’re currently earning £100,000, and get a £10,000 pay rise (not very realistic in the current climate, but it illustrates the point). £4,000 (40%) of that pay rise goes in tax immediately. However, you also lose £5,000 of your existing personal allowance, so now have to pay tax on it. As you’re paying tax on it at 40% that's an extra £2,000 of tax, which means that a full £6,000 of your £10,000 pay rise has gone in tax. That's a marginal tax rate of 60%. This means that there's suddenly an extra tax band created for anyone earning between £100,000 and around £113,000. The UK tax bands now go:
It seems unfair that someone earning £110,000 should be taxed at a higher effective rate than someone earning £120,000, let alone someone earning £160,000. What can you do about it? Speak to your L&M financial adviser about the possibility of making extra pension contributions. Depending on the level of your income, you could ‘get your own back’ on the taxman and nullify the 60% tax band, effectively getting 60% of your contribution paid for you. Article by Malcolm Norris Malcolm holds the Chartered Insurance Institute’s Diploma and is a specialist in taxation, trusts and pension advice.  |