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High earners in danger of falling into 60% 'tax trap' – how can you avoid it


Almost 400,000 people earning over £100,000 risk falling into a “tax trap”, leading to a 60 percent effective tax rate.

Research from investment platform InvestEngine has found that high earners could lose out on a cumulative £2.3 million in taxes if action is not taken.

For those who earn between £100,000 and £125,140 in any tax year, a proportion of their income will effectively be taxed at an eye-watering 60 percent.

This is because the tax rate is 40 percent but their annual personal allowance reduces by £1 for every £2 until £125,140 when it is lost completely.

This “tax trap” costs individuals thousands of pounds every year.

Andrew Prosser, head of investments at InvestEngine explains: “Let’s take the average income in the ‘tax trap’ range – £110,000. 

“This income incurs £4,000 in higher rate tax on the £10,000 exceeding the threshold, and loses £5,000 of personal allowance, subjecting it to 40 percent tax, costing another £2,000. In total, only £4,000 out of the £10,000 is retained, a 60 percent effective tax rate.

“Our research and analysis suggest that there are around 1.2 million people earning £100,000 or more in the UK, and of those, 862,000 are additional rate taxpayers (earning £125,140+). That leaves around 394,500 people in the £100k-£125k ‘trap’.

“Assuming an average income of £110,000, that’s a £6,000 ‘loss’ as a result of that effective 60 percent rate.”

The most efficient way to avoid this trap is pension saving as contributions to pensions benefit from tax relief at the marginal rate.

By making a contribution to a Self Invested Personal Pension (SIPP) high earners can avoid the trap altogether by bringing their net income down to £100,000.

Mr Prosser said: “Most (77 percent) people earning £100,000 or more say they are concerned their current (non-SIPP) pension is not on track to ensure a comfortable retirement, yet they are not making the most of pension contribution tax relief.

“In fact, our data shows that just 21 percent of those earning £100,000 or more have made a lump sum payment into their pension despite the fact that doing so could not only boost their pension pot, but is an extremely tax efficient way to invest, as illustrated by the way it can mitigate the ‘60 percent tax trap’.

“For additional rate taxpayers, pension relief is even greater, as a £1,000 contribution would only cost them £550. Therefore, if an additional rate taxpayer was to make the full £60,000 contribution, it would only actually cost them £33,000.”

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