April 26, 2024

The “problem” with earning over £100,000

An annual income of over £100,000 might sound very attractive, but itdoes come with its own financial consequences.

Losing the Income Tax personal Allowance

Once your annual income surpasses £100,000, you start to face a reduction in the income tax personal allowance - the initial £12,570 of your income that normally isn't subject to tax. This phenomenon is often referred to as the "60% tax trap”. Essentially, for every £2 you earn over £100,000, you lose £1 of your tax-free allowance, effectively increasing your tax rate significantly on income within this bracket. This steep incline in tax liability makes understanding and planning around this threshold crucial for effective financial management.

Another sting in the tail for high earners

Those earning over £100,000 also lose entitlements to tax-free childcare and free childcare hours. If you have young children, this can make it financially disadvantageous compared to earning just under £100,000 — a situation that can seem quite counterintuitive.

What happens in a household with more than one earner?

The rules apply on an individual basis. For example, a single earner with an income of £100,000 would face these financial penalties. Conversely, a household with two earners, each earning £95,000, would retain their full income tax personal allowances, and full entitlement to the childcare allowances - the free hours, and the tax-free childcare. This disparity highlights the need for careful financial planning.

So, is there a solution?

This scenario often leads to confusion and frustration. However, there are strategies to mitigate these effects, such as increasing pension contributions to reduce taxable income. Before taking any action, it’s crucial to consult with a financial adviser and obtain bespoke personalised advice that considers your own specific circumstances.

At Willow Tree Financial Services, we understand the complexities of navigating high-income tax implications.

Contact us for a bespoke consultation to explore how we can help you manage your finances efficiently and make the most of your earnings.

And to book a financial planning appointment, please get in touch via our contact page or book directly via my Calendly link.

Please note, this information is applicable only in England, Wales, and Northern Ireland. Tax rules differ significantly in Scotland; therefore, this guidance should not be relied upon for Scottish financial matters.

The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested. Tax treatment varies according to individual circumstances and is subject to change. Tax Advice is not regulated by the Financial Conduct Authority. Approver Quilter Financial Services Limited & Quilter Mortgage Planning Limited. 11.03.2024.

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