If you are a higher rate tax payer and your income exceeds £100,000 in a particular tax year, you could be losing your personal allowance and paying a marginal tax rate of 60%, this article will help clarify how to mitigate the £100,000 tax trap.
This post is intended to be a brief explainer, for a full breakdown of how the tax trap works you can find out here.
How the 60% tax trap works
You may not have ever heard of the 60% tax trap as it is not something that is readily spoken about. When you breach £100,000 in annual salary, nobody really prepares you for it. Whilst the legislation is relatively penal, there are ways to mitigate the 60% tax trap under certain circumstances.
What happens is that for every £2 that you earn above £100,000 your personal allowance is reduced by £1. Consequently, someone earning £125,140pa would have their personal tax free allowance completely slashed.
How to mitigate the tax?
The most effective way to do so is to pay more into your pension, reducing the amount of earnings that breach the £100,000 threshold. For example, if you earned £110,000, you would have a reduced personal allowance of £7,570. Implementing a net pension contribution of £8,000 (gross £10,000) would reduce your taxable income to £100,000 and restore your personal allowance.
For example, if your salary is just below £100,000, you could take pre-emptive steps. If you know your going to receive a bonus that takes you over £100,000 you could ask your employer to pay directly into your pension. You’ll need to ensure you have sufficient annual allowance available to do so. If you have the means to , then using a pension contribution to mitigate the 60% tax trap could just save you thousands.
The rules can and do change and so it is important to make sure you are acting on the most recent legislation when making any decisions. If you’d like some assistance with your pension planning from a local independent financial adviser near you, please do not hesitate to get in touch. If you are not local, we’re more than happy to meet via videoconferencing.
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