Go paper-free
Amend paper-free preferences for your statements and communications.
60% tax trap
Earn between £100,000 and £125,140? Be careful to avoid the tax trap.
What’s the tax trap?
You likely know that the higher tax rate in England is 40%. But, did you know some of your income could face an effective tax rate of 60%?
Check out our video (1min 36secs) and have a read of the information on this page to learn how to escape the trap.
Tax rates are different in Scotland, but the tax trap still exists.
-
As your income increases above £100,000, your personal tax allowance, or the amount you can earn tax free, reduces. For every £2 of income you earn over £100,000, you lose £1 of personal allowance. And that continues until you pay tax on every penny.
In Olive’s case:
- She earns £110,000.
- This means she loses £5,000 of her personal allowance.
- She therefore not only pays 40% tax on the final £10,000 that she earns.
- She also pays 40% tax on £5,000 of her income she didn’t previously, due to the personal allowance she has lost.
In the example below we compare how much of your income falls into each marginal rate of tax. Look closely at the 40% section and see how this part grows as your income exceeds £100,000. Also note how your personal allowance is reduced.
If Olive puts £10,000 into her pension, she reduces her ‘adjusted net income’ to £100,000. That means she doesn’t lose her personal allowance. She doesn’t fall into the tax trap, and she helps grow her pension, which could give her more money in retirement.
Is your income going over £100,000?
If you earn £100,000 and receive a £1,000 bonus, that bonus pushes your income above the £100,000 limit. At this point, you start to lose your personal allowance.
This means you'll face a tax rate of 60% on the amount you earn over £100,000. From that extra £1,000, you'll only keep £400 as income. You'll also pay National Insurance on the bonus. So, you'll end up with even less in your paycheque.
Remember, it's not just a bonus that can push you over the threshold. HMRC considers all your income sources when it figures out how much income tax you have to pay each year.
Sources of income could include your salary; dividends; rental income; interest and more. It’s important you think about the bigger picture so nothing’s missed.
I earn more than £125,140
Once you reach £125,140, you lose your personal allowance completely. From then on, you’ll pay tax on every penny you earn. This is also when you enter the additional rate tax band. This means you'll pay 45% tax or 48% if you live in Scotland.
Protecting your childcare benefits
Do I need to complete a tax return?
When you save into a personal pension, tax relief is important. If you're a higher-rate taxpayer, make sure to complete a tax return. This lets you claim back the tax relief you're entitled to.
Check the government website for a list of who must complete a self-assessment.
This includes:
- anyone earning over £150,000
- anyone who's received any untaxed income, for example from rental property or dividends.
Avoid the tax trap
Top up your pensions
Topping up your pension is a way to lower your tax bill and boost your finances for the future.
If you have a workplace pension, check if paying in more will encourage your employer to contribute as well.
You can also open a personal pension. It’s easy to get started with us.
Â
Looking for financial advice?
If you earn over £100,000 from a single income or have £100,000 in savings, investments, or a personal pension, our partners at Schroders Personal Wealth can offer you tailored financial advice.
The meetings, including the presentation of your initial financial plan, are free. Fees and charges apply if you take out a product or service. Check your eligibility and book an appointment with Schroders Personal Wealth.
Let’s take a closer look
-
If you expect your income to go over £100,000 this year, it’s a good idea to check with your employer about topping up your workplace pension. This can be helpful, especially if they also offer to contribute. Get in touch with your employer for more details.
Another option is to consider setting up a separate personal pension.
-
It’s simple to open a personal pension with us and start contributing right away, either monthly or as a lump sum.
We offer two pension options. They have different features that might suit you better, depending on how involved you want to be in selecting your investments.
- Ready-Made Pension: our retirement experts will manage your pension investments. They create a portfolio that fits your age and expected retirement date.
- Self-Invested Personal Pension (SIPP): gives you the choice of where to invest. This puts you in control of your investment strategy and financial future.
Pensions are a long-term investment. What you get back isn’t guaranteed and can go down as well as up. You could get back less than the amount(s) paid in.
By having your pension visible alongside your bank account in our app, it’s easy to keep track of. For more information or to open a pension, visit our pensions page.
-
The current income tax bands for England and Wales are as follows:
Income tax bands for England and Wales. Band
Taxable income
Tax rate
Band
Personal allowance
Taxable income
Up to £12,570
Tax rate
0%
Band
Basic rate
Taxable income
£12,571 to £50,270
Tax rate
20%
Band
Higher rate
Taxable income
£50,271 to £125,140
Tax rate
40%
Band
Additional rate
Taxable income
over £125,140
Tax rate
45%
-
Tax bands differ in Scotland, but that doesn’t mean the tax trap doesn’t impact you. In fact, it’s even bigger in Scotland as an advanced rate taxpayer pays 45% in income tax. Which means when you lose your personal allowance, you’re paying an effective rate of 67.5% tax on the income you’re earning between £100,000 and £125,140.
The current income tax bands for Scotland are as follows:
Current income tax bands for Scotland. Band
Taxable income
Scottish tax rate
Band
Personal Allowance
Taxable income
Up to £12,570
Scottish tax rate
0%
Band
Starter rate
Taxable income
£12,571 to £15,397
Scottish tax rate
19%
Band
Basic rate
Taxable income
£15,398 to £27,491
Scottish tax rate
20%
Band
Intermediate rate
Taxable income
£27,492 to £43,662
Scottish tax rate
21%
Band
Higher rate
Taxable income
£43,663 to £75,000
Scottish tax rate
42%
Band
Advanced rate
Taxable income
£75,001 to £125,140
Scottish tax rate
45%
Band
Top rate
Taxable income
Over £125,140
Scottish tax rate
48%