UK workers face losing thousands of pounds to tax thanks to a quirk of the HMRC Income Tax rules unless they take action by this Saturday. As the end of the tax year nears, UK households have just days left to sort out their tax situation and avoid a big tax trap which could see you paying an effective 60% tax rate on your income for this tax year, ending on April 5.
The new tax year starts on Sunday, April 6, which means households who need to bring their taxable salary below the magical £99,999 barrier to avoid an effective 60% tax rate have only days left to do it. If you do earn over £99,999, HMRC could change your tax code and reclaim any underpaid tax for this year from next week.
Most people are aware that income tax is paid at either 20%, 40% or 45% in England and Wales (though the rates are different in Scotland), but there is a specific set of circumstances which can see you lose 60% of your income to tax which the government still hasn’t fixed and will still be in place when the new tax year starts in April, too. Dubbed a ‘stealth tax’, the 60% tax trap is because of a quirk in the Personal Allowance system.
Everyone starts off with a Personal Allowance of £12,570, the amount you can earn tax-free without paying tax on it. For example, if you earn £20,000 in a year, you don’t pay 20% tax on that amount, you pay 20% tax on £7,230, or roughly £1,460 in tax. That’s because there’s no tax to pay on the first £12,570 you earn, then 20% on the rest, up to £50,270 when you pay 40% over that amount, and so on.
But those who earn £100,000 or more will start to lose their Personal Allowance. This tax-free amount is ‘tapered off’ for high earners. For every £2 you earn over £100,000, you lose £1 of your Personal Allowance.
On top of this, an extra 2% National Insurance takes even more money away.
As tax experts SJP explain: “In real terms, this means that for every £100 of income between £100,000 and £125,140, £40 is deducted in Income tax, while another £20 is lost by the tapering of the personal allowance. You will also pay Employee National insurance at 2% on the income. This amounts to a 60% tax rate, plus National insurance. Once you’re earning £125,140 or more, you don’t get any personal allowance at all. It feels like a double jeopardy.”
But there is still time to avoid the 60% tax rate if you act before April 5, the last day of the current tax year, and take steps to cut your tax bill.
They added: “One of the quickest and simplest ways to bring your taxable income below the threshold is to pay more into your pension before tax year-end. This is a win-win, since you reduce your tax bill and boost your retirement fund at the same time.
“Here’s an example. You get a £1,000 pay rise or bonus, which takes your taxable income to £101,000. If you pay that £1,000 into your pension, you won’t enter the 60% tax zone and you’ll get the benefit of a 40% top-up on your contribution, thanks to pension tax relief.”
