Well, firstly you get a nice kick in the ribs with any of your income from £101,000 - £125,000. Let's break this down:
Band Taxable Income Tax Rate
Personal Allowance Up to £12,570 0%
Basic Rate £12,570 to £50,270 20%
Higher Rate £50,270 to £125,140 40%
Additional Rate Over £125,140 45%
What does this mean in pounds & pence?
Firstly, your first £12,570 – You pay £0 in tax
The next £37,700 is at 20% – You pay £7,540 in tax
The next £49,730 is at 40% – You pay £19,892 in tax
Now this is £100,000 of taxable income, so far tax liability equals £27,432.
If you earn £125,140, the tax liability jumps to £42,516. This is because you lose your tax-free allowance by 50p for every extra £1 you earn.
That means for the extra £25,140 of income you have paid £15,084 essentially creating a marginal tax rate of 60% on the amount over £100,000.
So you may be thinking, how do I stop HMRC robbing me blind?
Well, my friends, we will give you a quick tip to avoid this situation and hopefully keep more of your money in your own pocket.
Here’s a quick one we use with our clients often.
Invest in your pension and maximise your tax position.
A quick calculation:
You invest £10,000 into your pension. The government then gives you £2,500 on top of our own contribution.
You also gain your full £12,500 personal allowance back which gives you a tax saving of £5,000.
For the £10,000 you have then invested into your pension, you receive a total benefit of £7,500. Yes, that is a 75% return on your money, which, you can probably agree would be impossible to get anywhere else.