If you earn over £100,000 per year, your £12,570 tax-free Personal Allowance is tapered away. This allowance is reduced by £1 for every £2 you earn over £100,000. For example, if your overall income for the year is £120,000, you will lose £10,000 of your Personal Allowance, leaving your tax-free allowance at £2,570.
The personal allowance is withdrawn completely where your earnings are over £125,140.
Earners of over £100,000 (higher rate taxpayers) must also file a self-assessment tax return.
For those who earn between £100,000 and £125,140, there is an effective rate of tax of 60%, so that for every £100 earned, there is an income tax charge of £40 and a further charge of £20 as a result of the lost personal allowance.
If we continue our example above, for earnings of £120,000, the tax liability on the amount over £100,000, in this case, £20,000, would be £12,000.
Individuals may be at risk of falling into the 60% tax trap if they receive pay rises or bonuses towards the end of the tax year, or business profits fluctuate.
When you contribute towards your pension, the number of contributions will reduce the level of earnings that fall into the 60% tax bracket. In addition, you receive tax relief on the amount paid in. For 2021/22, the contribution limit is 100% of your salary, or £40,000 (whichever is lower).
It is important to note that the £40,000 cap includes contributions made by you, your employer and any top-ups by HMRC. Any contributions surpassing this amount will not receive tax relief. If you are a higher or additional rate taxpayer, you can also benefit from higher rate tax relief.
Another way of ensuring some tax-efficiency is by making charitable donations through Gift Aid. If you’re a higher rate taxpayer, donating through Gift Aid is beneficial for you as well as for the charity being donated to. Donating through Gift Aid enables the charity to claim an extra 25p for each £1 donated. For example, if you were to donate £100, the charity can claim 25% Gift Aid which will total the donation up to £125. Gift Aid is similarly beneficial for higher rate taxpayers as you can claim back the difference between your tax rate (40-45%) and the basic rate (20%). What this would mean in this example as a higher rate taxpayer is you claiming back 20% of £125 (40% – 20% = 20%), reducing your tax bill by £25.
The startup investment schemes available to us in the UK comprise of The Seed Enterprise Investment Scheme (SEIS) which gives you 50% back, The Enterprise Investment Scheme (EIS) which gives you 30% back, and The Venture Capital Trust (VCT), all of which provide generous income tax and capital gains tax reliefs. They are designed to encourage investment in high-risk companies.
This scheme is an initiative that can be taken on by employers as a means of providing their employees with non-cash benefits in exchange for an agreed deduction of salary. It must be ensured by the employer that this proposal does not reduce an employee’s earnings below the National Minimum Wage (NMW). Not all employee benefit schemes allow for exemptions on tax and national insurance contributions – however, these few do:
Making use of these schemes provides you with the possibility of saving up to 62% on tax, depending on your marginal rate of income tax.
Partner - Personal Tax
Senior Tax Manager
Tax Manager (ex-HMRC)
FOR GENERAL INFORMATION ONLY. The information provided in this article is for general information only and does not constitute any specific advice or guidance. Whilst every care has been taken in the preparation of this article, it may contain errors and/or omissions. Always seek professional advice before taking any action. Last updated July 2021.