Has a 60% income tax rate reappeared?
The high marginal tax rates created by phasing out the personal allowance are back in the news.
‘A million to pay 60% income tax within years,’ ran a recent headline in The Sunday Telegraph. The next day The Times picked up on the same story with the article ‘Inflation may leave million more workers paying 60% tax’.
How the 60% tax rate happens
In 2022/23, Yasmin expects to have an income of £100,000 and is therefore entitled to a personal allowance of £12,570. If she receives an unexpected bonus of £10,000, her total income will be £110,000 and her personal allowance will be reduced by half of the amount by which her total income exceeds £100,000 – i.e. £5,000. As a result, she will not only pay tax of £4,000 on her bonus (at 40% outside Scotland), but she will also have to pay £2,000 of tax on the £5,000 of her income no longer covered by the personal allowance. The result is:
Total extra tax = £4,000 + £2,000 x 100% = 60%
Total extra income £10,000
If Yasmin received a bonus of over £25,140, she would lose all her personal allowance.
Whether either article counts as ‘news’ is debatable. The 60% income tax rate (or 61.5% on earnings in Scotland) has been around, in one form or another, since 2010/11. It is not, as The Times suggested, the result of ‘a glitch in the personal allowance regime’ but was the product of a carefully crafted piece of legislation. At the time, the aim was to raise extra revenue while keeping the threshold for the newly introduced 50% additional rate tax at £150,000.
The newspaper articles indirectly highlighted that:
Both factors mean that more taxpayers are being caught as incomes rise over time.
The one piece of good news is that if you are hit by 60% income tax you may also be able to claim 60% tax relief on pension contributions or gift aid.
–Femi Ogunshakin, Commercial Litigation & Tax Disputes Partner