UK high earners face 60% tax on certain salaries

Workers earning over £100,000 a year are facing a "hidden tax trap," which can lead to them paying as much as 60% on part of their income. This happens because for every pound earned above £100,000, a person loses 50p of their tax-free personal allowance. Currently, the personal allowance stands at £12,570. Once earnings reach £125,140, the entire allowance is gone, pushing effective tax rates to 60% on the income in that range. Personal finance expert Helen Morrissey from Hargreaves Lansdown suggests ways to avoid falling into this trap. She highlights that making pension contributions can lower taxable income. For instance, if someone earns £125,000, they would typically pay £42,432 in taxes. However, by contributing £25,000 to their pension, their taxable income drops back to £100,000, thus restoring their personal allowance and reducing their tax liability to £27,432. Even a smaller pension contribution, like £10,000, can still save significant tax if in a similar situation. Morrissey also mentions that using a salary sacrifice scheme can help reduce National Insurance costs. However, she advises careful planning, as pension funds cannot normally be accessed until age 55. These tax rules remain unchanged until 2028, with basic Income Tax starting at 20% and higher rates set at 40% and 45% for various income brackets. Since thresholds have been frozen since 2022, higher earners could find themselves paying more tax without any increase in rates, a situation known as "fiscal drag."