An annual income of over £100,000 might sound very attractive, but it does come with its own financial consequences.
Lose The Income Tax Personal Allowance
When someone earns over a £100,000, they begin to lose the income tax personal allowance that everybody gets. So this is the first £12,570 that you earn, which is usually not taxed. This is known as the 60% tax trap.
There’s another sting in the tail…
Earners over £100,000 will also lose any entitlement to tax free childcare or to free childcare hours. So this means that if you do have young children and you are earning that amount, anything between a £100,000 - £120,000, you might actually be worse off than if you earn £99,000, which feels like madness.
What happens in a household with more than one earner?
This is also based on a single earner. So you could have one family where one earner earns £110,000 and they would fall into this trap. But if you have a family where two earners were to earn £95,000 each, they would have full entitlement to the income tax personal allowance, and full entitlement to the childcare allowances - the free hours, and the tax free childcare.
Is there a solution?
So this is an area that often causes confusion and rightly so. There is a solution which is to increase pension contributions. But don't just go off and do this, make sure that you do speak to a financial adviser and that you get bespoke personalised advice that takes into account your own circumstances. Also, please bear in mind that this information only applies in England, Wales, and Northern Ireland. The rules in Scotland are slightly different, so if you're watching this from Scotland, please make sure you go and take advice there.
To watch Rachael explain this on camera, head over to our YouTube channel here…
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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.
ApproverQuilter Financial Services Limited & Quilter Mortgage Planning Limited.11.03.2024.
