What are the tax implications if I earn over £100k?

When earning over £100,000 in the United Kingdom, there are specific considerations and implications related to taxation that individuals should be aware of. HMRC applies certain rules and tax thresholds for individuals in this income bracket.

Firstly, it's important to note that the £100,000 threshold refers to an individual's taxable income, which includes earnings from employment, self-employment, rental income, dividends, and other sources. It does not include non-taxable income such as certain state benefits or tax-free savings accounts.

There are two things to consider if your net adjusted income is over £100,000.

Firstly, the government (HMRC) requires you to prepare a tax return, the Self Assessment.

Secondly, for any net adjusted income you earn over £100,000, you start to lose your personal allowance, pound for pound. In other words, there is a tapering of your personal allowance.

Do I really pay a 60% marginal tax rate?

Basically, everyone in the UK is entitled to an amount of money that’s tax-free. This is called the personal allowance.

For the tax year ending April 2022, the personal allowance is £12,570. You pay zero tax on this. For every pound you earn over £100,000, you lose a pound of your personal allowance and instead pay the basic rate of 20%.

If you think about it… that means for adjusted net income between £100,000 and £125,140 you are paying a marginal tax rate, the effective tax rate on each extra pound earned, of 60%. Yes, a whopping 60%.

For any amounts over £125,140, your marginal tax rate reverts to the higher rate of 40%, and for anyone lucky enough to earn over £150,000, your marginal tax rate is the additional rate of 45%.

How can I escape the "60 tax trap"?

Ultimately, income tax is payable on adjusted net income. This is net income after you have adjusted for permitted, tax free deductions, such as personal allowances and certain tax reliefs.

When earning over £100,000, individuals should also be aware of the various tax planning opportunities and allowances available to mitigate their tax liability. These may include utilizing tax-efficient investment options such as Individual Savings Accounts (ISAs), making pension contributions, or considering other tax reliefs and deductions available.

For example, you can offset, or deduct the following, from your taxable income;

trading losses
donations made to charities through Gift Aid (take off the gross-up amount)
pension contributions paid gross (before tax relief)
pension contributions where your pension provider has already given you relief at the basic rate (take off the gross-up amount)

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What are the tax implications if I earn over £100k?