Nowadays, there has been a significant change in the income that people can earn. Years before, a salary of £100,000 is hard to achieve even in a year. Thanks to the workforce’s innovative trends today, many people are now making a higher base income of over £100,000. A lot of sectors are now offering six-digit remuneration packages and even higher bonus and commissions! However, you might also be asking: is there any task implications when an earner breaks the £100k income mark? Let’s find out.
Learning about the tax implications for income over £100k
As of January 2021, the following table shows the tax rate for each income bracket:
|
Income Tax |
Rate |
|
Up to £12,500 0% |
Personal Allowance |
|
£12,501 to £50,000 |
20% Basic Rate |
|
£50,001 to £150,000 |
40% Higher Rate |
| Over £150,000 45% |
Additional Rate |
**Note: The £12,500 pertains to the starting personal tax allowance. It does not reflect any deductions in your personal circumstances from BIK/P11D restrictions, such as private medical, company car, etc.
Referring to the table above, you may think there is no significant difference in tax rate when earning £100,000 because it shows that you will pay 40% when you earn between £50,000 and £150,000. Here’s a big surprise: An effective 60% (40% + 20%) rate will start taking effect once your income passes the £100,000 mark.
HMRC starts reducing your yearly allowance and increasing the tax rate by 20% between the £100k and £125k salary range. As per this rule, the personal allowance will be reduced by £1 for each £2 of earnings higher than £100,000. That means if you usually receive the full amount allowance, yet your salary is £100,002, your personal allowance will be reduced to £12,499, and so on for every additional £2 earning. It means you will be paying the basic rate tax at 20% on every £1 lost from your allowance.
Your personal allowance is removed when you get £125K
Your £125k income removes your personal allowance and puts you on a basic tax rate for an income of £50k. Also, there is an additional increase in salaries of more than £150k, because this is the mark when 45% is added.
As you can see, there are parts of the income marks wherein staying £1 under the threshold seems to be more attractive than over £1.
Higher tax bills
Enjoying an income beyond £100k for the first time can be short-lived once you receive your
first tax bill. It may take time for the tax code system to catch up despite the advances in Making Tax Digital (MTD) and Real-Time Information (RTI), both established to lessen the latency between correct taxation and earnings. If you notice a somewhat hefty tax bill, you can submit a claim to fix it and reduce your tax payment the following year.
Conclusion
Earning an income over £100K can be both rewarding and a bit disappointing. Yes, the tax rate is higher, but on the other hand, there are also positive points about it. One of its advantages is being able to foresee the future and plan an effective pension program because the government will be paying 60% of the contribution effectively.
Earning this kind of amount is something to be grateful for. You’ve worked hard for it with the help of your skills, talents, efforts, and time. Plus, you are part of the UK’s 2% top earners!
If you need tax consultants in London, Accotax is here to assist. Our team of professionals will be happy to provide help and answer any of your concerns. Contact us today!
