Earnr AI, your new tax assistant, is here. Check it out now!
Stressed by tax?
Get Earnr Pro
Tax essentials

Explaining the 60% income tax rate in the UK

Desiree Weimann
Desiree Weimann
The elusive 60% income tax rate affects UK high earners with an annual income above £100,000.
Earnr is the finance and tax companion for the self-employed and side hustlers. We give you more time to run your business. Download Earnr for free on iOS. Need tax advice now? Ask Earnr AI, our new AI tax assistant

Taxes, taxes, taxes! Just when you thought you had a handle on the income tax system in the UK, along comes a sneaky 60% tax rate lurking in the shadows, ready to surprise unsuspecting high earners. We'll dive into the nitty-gritty of how this 60% income tax rate works, who it affects, and how to tame this taxation beast.

In the 2022/23 financial year, UK taxpayers generally have access to a tax-free personal allowance of £12,570. However, when your annual income goes above £100,000, this allowance gradually reduces. While you are stilled taxed and the higher rate tax threshold for any pound you earn above £100,000, you also get hit by a decreasing tax-free personal allowance. As a result, the effective tax rate can reach up to 60%.

How does the 60% income tax rate work?

Picture our friend Mike, who made £120,000 during the 2022/23 financial year. Because he's earned £20,000 above the £100,000 limit, his personal allowance takes a £10,000 hit, dwindling down to just £2,570.

So, what does this mean for Mike's taxes? Well, on the £20,000 income over the £100,000 line, he needs to pay £8,000 of Income Tax on the higher tax rate (40%). On top of that he needs to pay £4,000 in incremental tax thanks to his reduced personal allowance. This means that suddenly Mike's looking at a hefty £12,000 tax bill on the £20,000 he's earned above the £100,000 thresholds. That's a whopping 60% effective tax rate.

What to do if you are at the 60% income tax band?

If you find yourself in a similar position due to receiving end-of-year bonuses or fluctuating profits as a trader, there are a few tax-efficient methods you can consider to alleviate the impact of the 60% tax rate.

  1. Contribute to a personal pension: Self-Invested Personal Pensions (SIPPs) contributions, excluding salary sacrifice or employer contributions, can help balance the decrease in the higher rate threshold by increasing the basic rate band by 20% of the grossed-up amount.
  2. Donate through Gift Aid: Like pension contributions, the basic rate band extends by 20% of the grossed-up contributions when you make charitable donations using Gift Aid.

It's essential to remember that both of these strategies require available funds. So, evaluate your financial situation carefully before employing these methods to lessen the impact of the 60% tax band.

While most taxpayers in the UK benefit from a tax-free personal allowance, those with an annual income exceeding £100,000 may face a higher effective tax rate due to the reduction of this allowance. However, there are tax-efficient strategies, such as contributing to a personal pension or donating through Gift Aid, that can help mitigate the effects of the 60% tax rate.

Blog Home

Related blog posts

decorative image of a blog

Submit your 22/23 Tax Return Before January 31st

January 31st is the deadline for submitting 2022/23 tax returns. It's a good idea to complete your tax return ahead of this deadline to avoid mistakes and potential penalties. This article shows why its a good idea to submit your tax return early and how Earnr can help you if you are stuck.

Read more
decorative image of a blog

We asked Earnr AI why you should use Earnr…. here’s what it said…

We recently introduced our newest addition to the Earnr team; our AI chat bot, Earnr AI. In this article we put Earnr AI to the test and asked it why you should use Earnr as your tax companion, bookkeeping tool and tax return assistant. Read it's excellent response!

Read more
decorative image of a blog
December 20, 2023
Tax essentials

Why should you submit your tax return over the Christmas period?

The festive period is often thought of as the busiest time of the year with the run up to Christmas and New Year. Whilst this period can feel hectic at times, it can also be seen as the perfect time to complete your tax return. In this article we explain why this Christmas time is the best time to submit your 22/23 tax return.

Read more
Earnr logoDownload earnr