{"id":158464,"date":"2024-04-16T09:00:34","date_gmt":"2024-04-16T08:00:34","guid":{"rendered":"https:\/\/startups.co.uk\/?p=158464"},"modified":"2024-06-12T12:00:42","modified_gmt":"2024-06-12T11:00:42","slug":"60-per-cent-tax-trap","status":"publish","type":"post","link":"https:\/\/startups.co.uk\/people\/payroll\/60-per-cent-tax-trap\/","title":{"rendered":"Earning over \u00a3100k? Avoid the 60% tax trap"},"content":{"rendered":"<div class=\"wpb-content-wrapper\"><p>[vc_row][vc_column][vc_column_text]The topic of <a href=\"https:\/\/startups.co.uk\/people\/payroll\/how-to-pay-employees\/\">employee pay<\/a> can be a real can of worms. At first glance, it&rsquo;s simple: your staff will earn a set wage and be taxed depending on how much they earn. Rates increase incrementally, and no-one pays more than the highest tax band of 45% (48% in Scotland).<\/p>\n<p>Peel back the lid, however, and you&rsquo;ll realise that&rsquo;s not entirely true. Legislative loopholes mean workers on a higher salary might end up paying closer to 60% in tax &ndash; cutting short celebrations for those who have just received a pay boost or a promotion.<\/p>\n<p>Below, we&rsquo;ll explain this 60% &lsquo;tax trap&rsquo; in simple terms, so you can understand why it occurs, when, and how it might impact your tax bill. We&rsquo;ll also advise employers on how the tax quirk affects hiring, and how you can support staff affected by the rate.[\/vc_column_text]<\/p><div class=\"jumplinks-content\">\n <h3 class=\"jumplinks-content-title\">\n This article will cover: <\/h3>\n <ul class=\"jumplinks-content-list\">\n <li class=\"jumplinks-content-item\">\n <a class=\"jumplinks-content-link jumplink-anchor\" href=\"#link-what-is-the-60-tax-trap\">What is the 60% tax trap?<\/a>\n <\/li>\n <li class=\"jumplinks-content-item\">\n <a class=\"jumplinks-content-link jumplink-anchor\" href=\"#link-tax-implications-of-earning-over-100k\">Tax implications of earning over 100k<\/a>\n <\/li>\n <li class=\"jumplinks-content-item\">\n <a class=\"jumplinks-content-link jumplink-anchor\" href=\"#link-how-to-reduce-your-tax-rate\">How to reduce your tax rate<\/a>\n <\/li>\n <li class=\"jumplinks-content-item\">\n <a class=\"jumplinks-content-link jumplink-anchor\" href=\"#link-advice-for-employers-how-to-support-high-earning-employees\">Advice for employers: how to support high-earning employees<\/a>\n <\/li>\n <\/ul>\n<\/div>\n[\/vc_column][\/vc_row][vc_row][vc_column]<div class=\"jumplink-anchor-section\">\n <div class=\"jumplink-anchor-pointer\" id=\"link-what-is-the-60-tax-trap\"><\/div>\n<\/div>\n[vc_column_text]\n<h2>What is the 60% tax trap?<\/h2>\n<p>The &lsquo;60% tax trap&rsquo; is a wrinkle in the UK tax code which causes those earning at least &pound;100,000 to pay a larger effective tax rate than expected. You won&rsquo;t hear HMRC mention the tax trap because officially, it doesn&rsquo;t exist. UK tax brackets technically only go up to 45%.<\/p>\n<p>But a flaw in tax law means that, once someone&rsquo;s paycheck hits the &pound;100k threshold, their tax-free allowance begins to decrease. This can lead to a surprisingly big bill at the end of the year. Sometimes, they can end up paying 60% tax &ndash; or higher &ndash; on earnings.<\/p>\n<p>It can also limit access to the government&rsquo;s newly-announced <a href=\"https:\/\/startups.co.uk\/news\/100k-salary-not-enough-for-working-parents\/\">childcare support<\/a> measures. Working parents on a salary of over &pound;100k a year do not qualify for the perk &ndash; despite childcare costs now reaching up to &pound;1,781 a month in the UK.[\/vc_column_text]\n<\/p><div class=\"form-simple\" data-eventcategory=\"feedback\" data-eventaction=\"Email-Subscribe\">\n <form target=\"_blank\" class=\"form-subscribe\" id=\"form-subscribe\">\n\n <div class=\"form-loader\">\n <div class=\"spinner-box\">\n <span class=\"spin-loader\"><\/span>\n <p class=\"form-loader-text\">Verifying<\/p>\n <\/div>\n <\/div>\n\n <div class=\"form-subscribe-info\">\n <p class=\"form-subscribe-title\">Get the latest startup news, straight to your inbox<\/p>\n <p class=\"form-subscribe-subtitle\">Stay informed on the top business stories with Startups.co.uk&rsquo;s weekly newsletter<\/p>\n <\/div>\n\n <div class=\"form-subscribe-box\">\n <div class=\"input-row input-row-text\">\n <input type=\"text\" class=\"form-control\" name=\"first_name\" placeholder=\"Name\" required>\n <span class=\"input-row-error\">Please fill in your name<\/span>\n <\/div>\n\n <div class=\"input-row input-row-email\">\n <input type=\"email\" class=\"form-control\" name=\"email_address\" placeholder=\"Email Address\" required>\n <span class=\"input-row-error\">Please fill in your email<\/span>\n <\/div>\n\n <div class=\"google-inline-captcha\">\n <div class=\"captcha-message\">\n <span class=\"btn-close\"><\/span>\n <span class=\"form-messages\"><\/span>\n <\/div>\n <\/div>\n\n <button class=\"form-subscribe-button btn\" type=\"submit\" data-eventlabel=\"https:\/\/startups.co.uk\/wp-json\/wp\/v2\/posts\/158464\">\n Subscribe <\/button>\n <\/div>\n\n <p class=\"form-subscribe-privacy-policy\">\n By signing up to receive our newsletter, you agree to our <a href=\"https:\/\/www2.mvfglobal.com\/privacypolicy\/b649e\" title=\"Privacy Policy\">Privacy Policy<\/a>. You can <strong>unsubscribe<\/strong> at any time. <\/p>\n\n <\/form>\n<\/div>\n[\/vc_column][\/vc_row][vc_row][vc_column]<div class=\"jumplink-anchor-section\">\n <div class=\"jumplink-anchor-pointer\" id=\"link-tax-implications-of-earning-over-100k\"><\/div>\n<\/div>\n[vc_column_text]\n<h2>Tax implications of earning over 100k<\/h2>\n<p>Before we explain how the 60% tax trap impacts take-home pay, you&rsquo;ll need to understand three relevant tax terms:<\/p>\n<ul>\n<li><strong>Income Tax: <\/strong>a tax paid on <strong>all <\/strong>earnings. In FY 2024\/25, <a href=\"https:\/\/startups.co.uk\/tax\/uk-tax-brackets\/\"><strong>UK tax brackets<\/strong><\/a> range from 20%-48%, based on how much you earn and in which country you are based (in Scotland, rates are higher than in England, Wales, and Northern Ireland).<\/li>\n<li><strong>Personal Allowance: <\/strong>the amount of money a UK worker can earn tax-free. For the 2024\/25 tax year, the personal allowance is set at &pound;12,570 for all UK employees.<\/li>\n<li><a href=\"https:\/\/startups.co.uk\/people\/payroll\/national-insurance-rates\/\"><strong>National Insurance<\/strong><\/a>: a tax paid on wages, salaries, and company profits (for <a href=\"https:\/\/startups.co.uk\/setting-up\/become-a-sole-trader\/\"><strong>sole traders<\/strong><\/a>). NI rates start at 8% for earnings over the personal allowance. In FY 2024\/25, high earners pay an extra 2% on earnings over &pound;50,270 a year.<\/li>\n<\/ul>\n<p>The standard personal allowance prevents most employees from paying a rate of income tax above 45% (48% in Scotland). That line of tax defence disappears once you join the <a href=\"https:\/\/uk.jooble.org\/career-advice\/how-many-people-make-over-100k-per-year\/#:~:text=According%20to%20government%20data%2C%20only,or%20%C2%A3640%20per%20week).\" target=\"_blank\" rel=\"noopener noreferrer\">4% of UK workers<\/a> who earn &pound;100,000 a year, however.<\/p>\n<p>At this level, earners officially pay income tax at 45%. But, their personal allowance also tapers <strong>by &pound;1 for<\/strong> <strong>every &pound;2 they earn over &pound;100,000<\/strong>.<\/p>\n<p>It&rsquo;s incredibly complicated to grasp, but losing the allowance essentially creates a marginal tax effect, whereby high earners end up paying around 60% tax on earnings <strong>over &pound;100,000 <\/strong>&ndash; plus 2% in NICs (Scottish taxpayers could even be charged up to 69%).<\/p>\n<p><strong><em>Example<\/em><\/strong><em>: <\/em><em>Jonah makes &pound;100,000 a year and gets a &pound;1,000 bonus. He&rsquo;ll pay the standard higher rate tax (45%) on the entire bonus, leaving him with &pound;550 after the initial tax.<\/em><\/p>\n<p><em>However, because he earns over &pound;100,000 annually, he&rsquo;ll also lose &pound;1 of allowance for every &pound;2 he earns over the &pound;100k threshold. This lost allowance (&pound;500) is taxed at his normal rate (45%) which means he loses a further &pound;225 to the taxman.&nbsp;<\/em><\/p>\n<p><em>As a result, Jonah only gets to keep &pound;325 of his &pound;1,000 bonus. It feels like he was taxed 67.5%, even though the actual tax rate on the bonus was 45%.<\/em><\/p>\n<p>Once an individual&rsquo;s earnings reach &pound;125,140 or more per year, they&rsquo;ll have <strong>no personal allowance left<\/strong>, so the tax rate returns to 45%.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column]<\/p><div class=\"jumplink-anchor-section\">\n <div class=\"jumplink-anchor-pointer\" id=\"link-how-to-reduce-your-tax-rate\"><\/div>\n<\/div>\n[vc_column_text]\n<h2>How to reduce your tax rate<\/h2>\n<p>It&rsquo;s tempting to see the 60% tax rate as a wealth trap that affects only the very richest in society. But, as tax thresholds remain frozen and inflation erodes the value of salaries, it&rsquo;s smart for anyone earning over &pound;90,000 a year to keep the loophole on their radar.<\/p>\n<p>Frugal workers might also be punished. Your taxable income spans earnings from multiple sources, like interest earned on savings accounts or running a side hustle. With rising interest rates, the tax owed on this extra income could lose you your personal allowance.<\/p>\n<p>Self-employed workers should take particular note of the risks, given their personal income directly correlates to company profits. When deciding how much to <a href=\"https:\/\/startups.co.uk\/people\/how-to-decide-how-to-pay-yourself-in-your-business\/\">pay yourself as a business owner<\/a>, the 60% tax trap must be food for thought.<\/p>\n<p>If you have recently entered into the &pound;100k tax bracket, here are three ways to reduce your tax rate fairly and legally:<\/p>\n<h3>1. Contribute more to your pension<\/h3>\n<p>Paying into a pension pot can save you money today, and in future. <a href=\"https:\/\/startups.co.uk\/people\/pensions\/small-business-pensions\/\">Pension scheme<\/a> contributions are tax-free which means that whatever amount you put towards your retirement fund will also lower your taxable income; benefitting yourself instead of HMRC.<\/p>\n<p><strong><em>Example<\/em><\/strong><em>: Anita earns &pound;115,000 a year. She currently pays 10% (&pound;11,500) into her pension each year and is left with &pound;103,500 net income, so she&rsquo;ll take home <strong>&pound;50,616 after tax.<\/strong><\/em><\/p>\n<p>If she increases her pension contribution to 15% (&pound;17,250), Anita will be left with a net income of &pound;97,750, so she&rsquo;ll take home <strong>&pound;49,896 after tax.<\/strong><\/p>\n<p><em>After increasing her pension contributions by 5%, Anita takes home just under &pound;1,000 less per year after tax, despite paying an additional &pound;5,750 into her pension.<\/em><\/p>\n<h3>2. Make charitable donations<\/h3>\n<p>Another way to reduce your taxable income &ndash; and spread a bit of joy at the same time &ndash; is to give the money you&rsquo;d be taxed on to charity, instead.<\/p>\n<p>All donations made to registered charities in the UK qualify for gift aid, which allows the charity to reclaim income tax on the amount given for a bigger contribution to the cause.<\/p>\n<h3>3. Speak to a financial adviser<\/h3>\n<p>The ins and outs of UK tax law are complex, to say the least. The Startups team have been writing about employee payroll and taxes for decades, but we can&rsquo;t give individually customised recommendations for your own circumstances. For sound financial advice, <a href=\"https:\/\/startups.co.uk\/people\/payroll\/payroll-service-providers\/\">payroll service providers<\/a> offer bespoke help based on your exact payslip, take-home pay, and taxes. You can also speak with a <a href=\"https:\/\/startups.co.uk\/funding\/financial-advisors\/\">small business financial adviser<\/a> to consult on the specifics of your tax recommendations.<\/p>\n<p>If you&rsquo;re expecting a raise, bonus, or role change that might affect your tax bracket; a payroll expert can estimate the impact on net pay and advise if it&rsquo;s a smart decision.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column]<\/p><div class=\"jumplink-anchor-section\">\n <div class=\"jumplink-anchor-pointer\" id=\"link-advice-for-employers-how-to-support-high-earning-employees\"><\/div>\n<\/div>\n[vc_column_text]\n<h2>Advice for employers: how to support high-earning employees<\/h2>\n<p>Discovering that a salary top-up actually leaves workers <em>worse off <\/em>due to the 60% tax trap can be a nasty shock for employees.<\/p>\n<p>It&rsquo;s also an issue for organisations because, as their salary reflects, high-income employees tend to be your most valuable and experienced workers. So how do you show a talented worker your appreciation without lumping them with a huge year-end tax invoice?<\/p>\n<p>Here are three methods to support employees who are affected by the tax trap:<\/p>\n<h3>1. Promote pension contributions:<\/h3>\n<p>If you haven&rsquo;t already, enrol your team onto a <a href=\"https:\/\/startups.co.uk\/people\/payroll\/salary-sacrifice-schemes-guide\/\">salary sacrifice<\/a> pension scheme and encourage them to pay more into the pot. As previously stated, this will allow employees to reduce their taxable income without you needing to freeze pay.<\/p>\n<p>Workers may be frustrated they have to wait longer to access their hard-earned wonga. HR teams should provide educational resources to make clear how they might access these benefits early through <a href=\"https:\/\/startups.co.uk\/people\/management\/phased-retirement\/\">phased retirement<\/a>.<\/p>\n<h3>2. Benefits and bonuses:<\/h3>\n<p>Cash isn&rsquo;t the only way to motivate team members. Consider offering <a href=\"https:\/\/startups.co.uk\/people\/management\/employee-benefits-perks-retention\/\">employee benefits<\/a> that aren&rsquo;t taxed as heavily as salary, such as a subsidised <a href=\"https:\/\/startups.co.uk\/news\/gympass-central-london\/\">gym membership<\/a> or health insurance.<\/p>\n<p>Childcare vouchers are another option. People earning over &pound;100,000 a year do not qualify for childcare support from the government, so any measures that help working parents &ndash; such as <a href=\"https:\/\/startups.co.uk\/people\/flexible-working\/\">flexible working<\/a> &ndash; might be more welcomed by mums and dads.<\/p>\n<h3>3. Financial planning resources:<\/h3>\n<p>When in doubt, ask the experts. Bringing in a third-party advisor or financial wellbeing app, like <a href=\"https:\/\/startups.co.uk\/startups-100\/2023\/mintago\/\">Mintago<\/a>, will help them get to grips with complex tax legislation and how it relates to their savings plans; two areas that can be particularly confusing for employees to understand.<\/p>\n<p>Financial wellness programs are especially in-demand in today&rsquo;s economy. As the cost of living crisis batters staff wages, providing advice on how to get the most out of their salary may prove to be as helpful to employees as a <a href=\"https:\/\/startups.co.uk\/news\/how-to-ask-for-a-pay-rise\/\">pay rise this year<\/a>.<\/p>\n<p><strong>Related reading:<\/strong><\/p>\n<ul>\n<li><a href=\"https:\/\/startups.co.uk\/people\/payroll\/how-much-should-you-pay-your-staff\/\">How much should you pay your staff<\/a><\/li>\n<li><a href=\"https:\/\/startups.co.uk\/startups-100\/2021\/taxscouts\/\">TaxScout&rsquo;s<\/a> guide to <a href=\"https:\/\/taxscouts.com\/high-earner-tax-returns\/60-tax-what-to-do-if-you-just-started-earning-over-100000\/\" target=\"_blank\" rel=\"noopener noreferrer\">pension tax relief for 60% tax trap<\/a><\/li>\n<li><a href=\"https:\/\/startups.co.uk\/news\/incoming-tax-changes\/\">Full list of tax changes for 2024<\/a><\/li>\n<\/ul>\n<p>[\/vc_column_text][\/vc_column][\/vc_row]<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>[vc_row][vc_column][vc_column_text]The topic of employee pay can be a real can of worms. At first glance, it&rsquo;s simple: your staff will earn a set wage and be taxed depending on how much they earn. Rates increase incrementally, and no-one pays more than the highest tax band of 45% (48% in Scotland). Peel back the lid, however, [&hellip;]<\/p>\n","protected":false},"author":91483,"featured_media":158465,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4224],"tags":[],"acf":[],"yoast_head":"\n<title>60% Tax Trap Explained + Tax Implications for 2024 - Startups<\/title>\n<meta name=\"description\" content=\"We explain what\u2019s behind the dreaded 60% tax trap for high earners, as well as how to mitigate its impact for employees.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/startups.co.uk\/people\/payroll\/60-per-cent-tax-trap\/\" \/>\n<meta property=\"og:locale\" content=\"en_GB\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"60% Tax Trap Explained + Tax Implications for 2024 - Startups\" \/>\n<meta property=\"og:description\" content=\"We explain what\u2019s behind the dreaded 60% tax trap for high earners, as well as how to mitigate its impact for employees.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/startups.co.uk\/people\/payroll\/60-per-cent-tax-trap\/\" \/>\n<meta property=\"og:site_name\" content=\"Startups.co.uk\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/startups.co.uk\" \/>\n<meta property=\"article:published_time\" content=\"2024-04-16T08:00:34+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2024-06-12T11:00:42+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/images.startups.co.uk\/wp-content\/uploads\/2024\/04\/Tax-trap.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1500\" \/>\n\t<meta property=\"og:image:height\" content=\"949\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Helena Young\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@startupstowers\" \/>\n<meta name=\"twitter:site\" content=\"@startupstowers\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Helena Young\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"7 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/startups.co.uk\/people\/payroll\/60-per-cent-tax-trap\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/startups.co.uk\/people\/payroll\/60-per-cent-tax-trap\/\"},\"author\":{\"name\":\"Helena Young\",\"@id\":\"https:\/\/startups.co.uk\/#\/schema\/person\/df7a45df2f532172a027cd47886bbbeb\"},\"headline\":\"Earning over \u00a3100k? 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