Taking Account

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Caught by the Personal Allowance Trrap

March 2012

Do you know if you are one of the 700,000+ people paying a marginal income tax rate of 60%? This is an increasingly unfair trap which exists if your income is just over £100,000. That means you are a 40% taxpayer, but some of your income will (amazingly) be taxed at 60%. You may not even realise this as it is not absolutely clear from the tax computation we produce for you each tax year.

How can this happen? It’s all down to the withdrawal of the personal tax allowance by £1 for every £2 that your income exceeds the magic figure of £100,000. And with the large increase in the personal allowance (the plan is to get that up to £10,000 eventually) it is a tax trap that will affect more and more people each year. Here is what it means in figures for 2011/12:

Taxable income Marginal rate
£100,000 to £114,950 60%
£114,951 to £149,999 40%
£150,000 + 50%

And for the next tax year 2012/13 it is even worse in terms of the number of people affected:

Taxable income Marginal rate
£100,000 to £116,210 60%
£116,210 to £149,999 40%
£150,000 + 50%

As if the above was not bad enough, add in your national insurance contributions at 2% if employed or self-employed and you suffer a marginal rate of 62%!

There are several techniques available to avoid this unacceptable tax rate. Please contact us for help.

Hilton Sharp & Clarke