What is the 60% tax trap?

If you are a high earner in the UK, you may have heard of the 60% tax trap. You may be thinking that 60% sounds rather high and thought the additional rate of income tax was 45%. This is because it’s not an official tax rate, but instead an “effective” rate that will impact those earning between £100,000 and £125,140.

For every £2 you earn above £100,000, you will lose £1 of your personal allowance (currently £12,570) which would normally be exempt from tax. However, combine this loss of allowance with the standard tax rate, it results in an effective rate of 60% on income that lands within this range.

If you’re income is within this tricky range for tax purposes, do not fear, WKM is here.

Strategies to reduce exposure to 60% tax trap

Salary sacrifice through your employer (pension contributions, electric vehicle, lease car) is one way to reduce your income below £100,000 to retain your full personal allowance.

Personal pension contributions will reduce your income tax liability. Not only will you benefit from no or reduced exposure to the 60% tax trap, but you will also reap other benefits of contributing into a pension, tax free growth and income tax relief being the main ones.

If your partner earns less than you, consider transferring income-producing assets (such as rental properties or shares) to take advantage of their lower tax band.

Invest in tax-efficient products

Making sensible tax-efficient investments will help you grow capital without increasing your tax liability.

ISA’s (Individual Savings Accounts) allow you to invest £20,000 per annum. The main benefits being no tax on income or gains.

For those that have a more adventurous attitude to risk, Venture Capital Trusts (VCT’s) and Enterprise Investment Schemes (EIS’s) are available and offer tax benefits such as 30% income tax relief and tax-free growth. Benefits of these products are subject to certain requirements being met; we can explore these in a future blog.

Conclusion

Hearing of the 60% tax trap may seem daunting, but with the right strategies implemented, your tax liability can be reduced to leave you with more of your hard-earned income.

To get the most out of your financial planning, regular reviews and ongoing analysis is vital, the best time to start is now.

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