UK income tax effective rate now reaches 60%

Many people may not realize that the effective top rate of income tax in the UK is now 60%. This high tax rate comes from a lesser-known rule that reduces personal tax allowances for those earning between £100,000 and £125,140 annually. Currently, the UK has three main income tax bands. The basic rate is 20% on earnings over £12,570, the higher rate is 40% on earnings over £50,270, and the additional rate is 45% for those earning above £125,140. These rates will remain unchanged until at least 2028, and may even be frozen until 2030. The 60% tax rate occurs when someone makes more than £100,000. For every £2 earned over this amount, the personal allowance decreases by £1, effectively erasing any tax-free income at £125,140. Tax expert Helen Morrissey describes this situation as a "stealth tax," as many do not notice how much is taken from their earnings. Over the past 15 years, the £100,000 threshold has not increased, causing more people to fall into this high tax bracket. While some may argue that earning £100,000 is a lot, the impact of losing 60% of your income can be significant, particularly when considering other taxes like National Insurance and VAT. For higher earners, there are strategies to reduce their tax burden. Contributing to a pension can lower taxable income, allowing individuals to pull themselves out of the 60% trap. For example, someone earning £125,000 could reduce their income to £100,000 by contributing £25,000 to their pension, which would save them a substantial amount in taxes. Even smaller pension contributions can also help lower tax bills. If someone contributes £10,000, they could save around £6,000 in tax. Additionally, those with salary sacrifice schemes at work may find extra savings on their National Insurance contributions. However, it is important to note that money put into pensions typically cannot be accessed until the age of 55. Therefore, potential contributors should ensure they can manage without that income when deciding to make pension contributions.