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The Personal Allowance (PA) represents the amount of income that an individual can earn free of income tax. The standard PA for those under 65 years old is £12,000 per annum (2019/20).
In April 2010 the Treasury introduced legislation that seeks to remove the personal allowance of those people earning over £100,000.
Since April 2010, people with ‘net adjusted annual income’ of over £100,000 will have their personal allowance reduced or even removed. The reduction is at a rate of £1 for every £2 of income over £100,000.
Based on the current standard personal allowance, this means that anyone with income over £120,000 will lose their personal allowance completely. This means that an additional £10,000 of income for such high earners is now being taxed at 40% or even 45%, whereas before this date it was not taxed at all. 45% on this £10,000 could mean additional income tax of £4,500.
The effective marginal tax rate on earnings between £100,000 and £120,000 is 60%.
There are various means by which those earning over £100k can consider to avoid some or all of the 60% tax.
To find out more about our tax planning services get in touch with our team.
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