Have you got extra tax to pay?
Watch out – could you be caught in a 60% income tax band!
Prior to the self assessment tax return filing deadline it is sensible to look at planning for anomalies or quirks in the tax system.
What is the highest rate of UK income tax?
You may think 40%, but that is only the higher rate band.
45% – generally yes, for very high earners – taxable income over £150,000
So who pays 60%! Well actually anyone with taxable income over £100,000!!
Current HMRC estimates are that over 1m people will be in this bracket next year, although the threshold has been unchanged since 2010.
That can’t be right or fair – but it is. It also means that if you haven’t already filed this year’s tax return or completed your tax calculations, you may need to prepare yourself for a nasty shock.
How can this be? Well, the way our tax system works you pay 20% on the first £33,500 of taxable income, after deducting your personal allowance of £11,500.
Then up to taxable income over £33,500 and up to £150,000 you are taxed at the higher rate of 40%
And over that at the “additional rate” of 45%
BUT – there is a point where your taxable income exceeds £100,000 that your personal allowance of £11,500 is clawed back by £1 for every £2 of income above £100,000. If you are “lucky” enough to have taxable income of £123,000 or more your entire personal allowance is wiped out.
The tax effect is that you pay not only 40% but effectively another 20% within that band. So if your taxable income is £123,000 you end up paying 60% on £23,000!
The other quirk here is that this does NOT get dealt with in the PAYE system. Therefore if your taxable income is above £100,000 you could have additional tax to pay by 31 January – up to £23,000 at 20% i.e. an additional £4,600. That could come as quite a shock.
So make sure you do your calculations and file your tax return in good time. Then you will know how much tax to put aside. With specialist help there may also be quite legal ways to reduce the liability.
For further advice existing clients email us at support@anytime.uk.com or call 03333 110 230
For new enquiries contact us now
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