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home | Old Articles | Effective 60% rate of tax for 2013/2 . . .

Effective 60% rate of tax for 2013/2014


You may have seen reference to an effective 60% rate of income tax applying after April 2010. As we've been asked numerous times about this here's a brief outline as to how it arises:10 ways to avoid the 60% effective rate of tax

How the 60% effective tax rate arises

There are some big changes to the personal allowance that have come into effect from April 2010. There is now a new limit designed to restrict the amount of the personal allowance available.

From 2010-11, where an individuals adjusted net income is above the income limit of £100,000, the amount of the allowance will be reduced by £1 for every £2 above the income limit.

When your income exceeds the £100,000 limit the personal allowance will be reduced by £1 for every £2 over the limit (in other words, by half of the amount by which your income exceeds the limit).

This is serious blow to taxpayers with more than £100,000 income because the personal allowance would save you around £3,000 in tax.

Examples

Here are some examples showing how the new rules will apply. This is based on the rates and allowances for 2013/2014.

1. Jack has earnings of £50,000. He will qualify for the full personal allowance of £9,440 which will reduce his taxable income to £40,560

2. Bill has earnings of £110,000. His earnings exceed the £100,000 limit by £10,000. Therefore his personal allowance would be reduced by £5,000. Therefore Bill will receive a personal allowance of £4,440.

3. Percy has earnings of £160,000. Like Bill, his earnings exceed the £100,000 limit. However, because he has exceeded the £100,000 limit by £60,000 this would reduce his personal allowance to zero.

Effective 60% tax rate

These changes to the personal allowance mean that once you reach £100,000 of income your personal allowance is restricted. Once you exceed £118,880 you won't get any personal allowance.

This means that where you have income within the range of £100,000 - £118,880 you could be faced with a 60% effective rate of tax.

This is calculated as follows:

Income of £100,000

If you have income of £100,000 you'll be taxed as:

Income = £100,000

Personal allowance -£9,440

Taxable income = £90,560

Basic rate tax £32,010 @ 20% = £6,402

Higher rate tax £58,550@ 40% = £23,420

Total tax payable = £29,822

Now compare this with someone who earns £118,000.

Income of £118,000

They'll pay tax of:

Taxable income (no personal allowance) £118,000

Basic rate tax £32,010 @ 20% = £6,402

Higher rate tax £85,990 @ 40% = £34,396

Total tax payable = £40,798

Therefore on the additional £18,000 you are subject to additional tax of £10,976. This equates to an effective income tax rate of just over 60%.

Latest Income Tax Questions

How to avoid the 60% effective tax rate?

If you're interested in tax planning strategies to avoid the 60% effective tax rate we have looked at the main strategies available in this tax planning report:

FREE REPORT - How to Avoid The 60% Tax Rate
10 Ways To Avoid The 60% Effective Rate Of Tax10 Ways To Avoid The 60% Effective Rate Of Tax
The 60% effective rate of income tax will effect anyone earning between £100,000 and around £118,000.In this report we look at some options to avoid the 60% rate of income tax including using companie . . . keep reading


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About the Author

Lee Hadnum
The Author of this article is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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