How to Avoid the 60% Tax Trap

We are all responsible for paying taxes and contributing to society. While most are happy to play their part, there is also a situation where people want to avoid paying more tax than its worth. This is the case with the 60% tax trap.

What is the 60% tax trap?

The 60% tax trap comes into play for individuals that have an income that exceeds £100,000 per annum. This is based on the current tax bands and brackets, which are as follows:

• Personal Allowance (up to £12,570), 0% tax rate
• Basic rate (£12,571 to £50,270), 20% tax rate
• Higher rate (£50,271 to £150,000), 40% tax rate
• Additional rate (over £150,000), 45% tax rate

The Personal Allowance dictates the amount of money exempt from taxation. For example, if someone was to earn £22,570 per year, they would only pay tax on £10,000 of their earnings. However, the Personal Allowance amount begins to drop if someone has an income beyond £100,000.

How does this work? Well, for every £2 of income that exceeds the £100,000 threshold, £1 is deducted from your Personal Allowance. That means if your annual income is £125,140 or higher, your entire Personal Allowance is lost. When you add in tapering restrictions and how the Personal Allowance is steadily eradicated, the amount taxed can reach 60% – hence the “60% tax trap” name.

Why does the 60% tax trap exist?

The 60% tax trap exists because the government is looking for every method to squeeze more contributions from taxpayers. While it may not have been an intentional “tax trap”, it has been done in such a way that higher rate earners contribute more money with their taxes.

How to take advantage of tax relief to avoid the 60% tax trap

With the right tax planning, avoiding the 60% tax trap is possible. One of the most effective methods is to invest in your pension and take advantage of tax relief.

In essence, making pension contributions has a double positive effect on your taxable income. Firstly, it allows you to reduce your taxable income. If you are earning above £100,000, your pension contributions can stop you from losing your Personal Allowance. Secondly, you can also claim tax relief against these pension contributions.

Other strategies to avoid the 60% tax trap

While your pension is an excellent solution for both retirement planning and avoiding the 60% tax trap, there are other strategies you can utilise. In fact, there are numerous tactics you can implement to lower your tax bill. Here’s a look at some popular options:

• Cycle to work: With the popular cycle-to-work program, it is possible to “buy” a bicycle by giving up a portion of your salary. It works similarly to pension contributions with your income tax, where you reduce your taxable income and gain rewards in the process.
• Low-emission cars: If you need to drive rather than cycle, think about getting a low-emission car. If you lease a corporate vehicle that’s ultra-low emission, it is possible to save up to 30% of its total cost with salary sacrifice.
• Childcare vouchers: If you require childcare services, this can be a savvy way to reduce your taxable income. With childcare vouchers, you can acquire tax-free childcare vouchers in exchange for a portion of your wages. Higher-rate taxpayers can get up to £124 childcare vouchers per month.

Conclusion

The 60% tax trap is something you want to avoid. Fortunately, with pension contributions and other solutions, this is a trap you can dodge with relative ease. See which option works best for you to avoid finding yourself in the trap.

You might also like:

Do pensions reduce tax for the self-employed?

Is my pension subject to inheritance tax?

Disclaimer 

The content of this article is for general information purposes only and should not be construed as legal, financial or taxation advice. You should not rely on the information contained in this article as legal, financial or taxation advice. The content of this article is based on information currently available to us, and the current laws in force in the UK. The content does not take account of individual circumstances and may not reflect recent changes in the law since the date it was created. It is essential that detailed financial and tax advice should be sought in both jurisdictions and any legal advice, if required.

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