Avoiding 60% tax
You effectively pay tax at 60% on income over £100,000 because you pay tax at 40%, plus you start to lose your personal allowance, which also increases your tax.
Your personal allowance is £10,600 for the current tax year. The rule is that you lose £1 of allowance for every £2 of income over £100,000. So, if your income is £101,000 then the tax of the £1,000 over £100,000 is 40% of £1000 (£400) plus £200 (40% of £500 being the reduction in the personal allowance). This is a tax rate of £600 on £1,000 = 60%.
This tax rate applies between £100,000 and £121,200 because at this level there is no personal allowance left. So, it can be useful to look to reduce your income below £100,000.
Here are three ways to reduce your income below £100,000 and save tax at 60%.
Contributing to a pension scheme will reduce your taxable income. So, for example, if you had income of £121,200 and contributed £21,200 you would save tax of £12,720. This would make the cost of the pension contribution £8,480.
Keep in mind that you can get 25% out tax free which is £5,300 which would leave £15,900 in your pension at a cost of £3,180.
It is possible to transfer assets that generate income to your spouse or civil partner. This can reduce your personal income for tax.
Your spouse or partner may have to pay tax at 40% but you won’t lose your personal allowance, so you save tax of 20% on the income.
If you have a company you can delay or bring forward income by paying dividends at different times. It is possible to let profit roll-up in a limited company and pay out dividends over many years when you wind down or retire. In effect, you use your company as a pension fund.
Another option is to let profit roll up in a limited company and pay out profits as a capital distribution when you close the company.