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Income In Excess of £100,000 – Are There Tax Efficiencies For A Higher Earner?Written on July 20, 2022 by Kirk Rice LLP

The Question:

I work in sales and recently I secured a big sale for my company which will result in a large commission for me. This will propel my total income to in excess of £100,000 this year. As a higher earner, I understand that this may result in me losing my personal allowance. Is that right and can I do anything about it?

Kirk Rice LLP answers:

If someone is a higher earner and earns more than £100,000, they may be paying tax at a whopping 60%! You will not find this rate listed on the HMRC website, but because the personal tax allowance is withdrawn for income over £100,000, earnings of between £100,000 and £125,140 (2022/23) will be taxed at an effective rate of 60%. This can be illustrated by way of an example;

Let’s say someone earns £100,000 and a bonus of £1,000. How much tax will be paid on the bonus? The normal tax rate for this level of income is 40%, and so the tax on the bonus is £400. However, because of the bonus, it takes the total income over £100,000; at his point, the personal allowance starts to be withdrawn. The allowance is withdrawn at a rate of £1 for every £2 of income earned over £100,000, and so in this example £500 of the allowance will be lost. This means that £500 of the normal earnings will now be taxed at 40% as the allowance no longer covers them. £500 at 40% is £200. Accordingly, the £1,000 bonus will cost £600 in tax (£400 plus £200), i.e. an effective 60% tax rate.

So can anything be done to avoid the additional tax for a higher earner? For personal allowance withdrawal purposes, total earnings are reduced by any payments made in the tax year under Gift Aid or into a personal pension. Using a pension contribution as an example, if someone pays £800 into their pension, HMRC automatically tops this up with a further £200. The £200 represents the basic rate tax relief that is available. As a higher-rate taxpayer, you will get higher tax relief on the contribution. Usually, this means you would get a further £200 back from HMRC directly, and so overall, the £1,000 gross contribution has only cost you £600 (£800 paid into the pension less the £200 refund from HMRC).

However, because pension contributions reduce total income for personal allowances, your personal allowance would be reinstated. This means you would recoup £400 from HMRC rather than £200. The bottom line is that your £1,000 investment into your pension has only cost you £400 (£800 paid in the pension less the £400 refund from HMRC). To claim the higher rate tax relief, you must make the pension contribution before the end of the tax year (5 April 2023) and complete a tax return for 2022/2023.

Please note that limits and tapering of the pension annual allowance may limit the scope of contributions you may gain tax relief on or what you can contribute before a tax charge kicks in. As such, you should ask Kirk Rice LLP or your IFA to confirm the tax effect of any new pension contributions you may wish to make.

Any reader interested in discussing the tax implications of being a higher earner can call 01344 875 000 or email info@kirkrice.co.uk. 

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future.