Could you end up paying 70% tax?
It may sound hard to believe but 70% tax is a very real concern for some savers. Here, Partner and Chartered Financial Planner Andy Baker explains how tax liabilities can rack up quicker than you think and why it’s worth checking what you’re paying.
A 70% tax rate might sound like a ghost story from the HMRC but unfortunately, it’s a very real thing. And what’s more, it is a worryingly easy thing to slip into as finances grow and become more complex. Let me explain how and give you an idea of how we help protect our clients in this situation.
In the current tax year (2018/19), everyone in the UK gets a personal allowance of £11,850 on which they pay 0% income tax. For those who earn over £100,000, this personal allowance recedes at £1 for every £2 earned over the £100,000. They would also be regarded as a high rate tax payer, paying 40% on their income (starting at £46,351 in 2018/19). With the personal allowance used up, an additional 20% of tax (the basic rate in 2018/19) is added to this liability. Therefore, if you earned £124,000 your personal allowance would be wiped out and you essentially pay 60% tax on the top £24,000 earned.
Things get worse when it comes to childcare. Parents of 3-4 year olds get 30 hours’ free childcare but this is reduced by half if they earn over £100,000. Ultimately, those earning over £100,000 forgo around £2,400 towards childcare costs. Added together, the tax rate on the top £24,000 will be around 70% – (costing £17,000). Also, if you earn £105,000 and lose your additional 15 hours’ childcare then the top £5,000 you earn actually costs you £5,400!
This tax rate isn’t officially recognised by HMRC but as we can see, it’s worryingly easy for liabilities to pile up and eat into your earnings.
Many of our clients earn over £100,000 so we spend a lot of time talking them through the tax pitfalls and complications facing higher earners. A helpful strategy we pursue is reducing someone’s income below £100,000.
There are several ways to do this – such as by making pension contributions or charitable donations that receive gift aid – allowing clients to reclaim their personal allowance and their 15 hours’ free childcare, plus higher rate tax relief. The allowances are there and available, you just need to know how to use them.
Do you know how much tax you might end up paying? Or are you worried about potentially missing out on valuable childcare? Get in touch. to find out more.
Disclaimer: The information provided is based on our understanding of current rules and regulations, which may change. The impact of any tax changes will depend on individual circumstances. This blog is a summary of recent developments and should not be regarded as a substitute for advice in any particular case.