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Earning over £100,000 can be a significant milestone for anyone living in the UK. However, it's important to understand the tax implications of this higher income.
In this article, we’ll explore how the UK income tax system works, what this means for individuals earning over £100,000, and the tax relief options that you should be aware of when your earnings reach and surpass six figures.
By understanding the tax implications of earning over £100,000, you can make financially savvy decisions to minimise your tax bill and maximise your savings for later in life.
Let’s start by breaking down how the UK income tax system works:
How do UK income tax rates work?
Every worker living in the UK is subject to income tax, which is charged based on their yearly income. The tax rates are divided into several bands or tax brackets, each with its own corresponding tax rate.
In the current UK tax system, individuals earning less than £100,000 won’t be charged any tax on the first £12,570 they earn. Above that, there are three main tax brackets: you’ll be taxed the basic rate (20%) on everything you earn up to £50,270, then the higher rate (40%) on everything you earn up to £125,140 and then the additional rate (45%) on everything you earn above that, as shown in the table below.
Here are the current income tax rates and bands for the 2024-25 tax year:
If you live in Scotland, you’ll be subject to different tax rates and thresholds this year:
You can read our recent article on “What is the 40% tax bracket?” to understand how these ‘marginal tax rates’ work.
What changes when you hit £100k?
There are a couple of key changes that take place once you become a six-figure earner. Crucially, once you begin earning £100,000, you start losing your tax-free Personal Allowance. For every £2 you earn over £100,000, you lose £1 of your tax-free Personal Allowance, which will instead be taxed at the higher rate (40%).
The rest of your income up to £125,140 will be taxed according to the normal rates. This means your income up to £50,270 will be taxed at the basic rate (20%), your income between £50,271 and £125,140 will be subject to the higher rate of tax (40%), and all of your earnings over £125,140 will be subject to the additional rate (45%) as well.
However, because of the loss of your Personal Allowance, you will effectively be taxed at 60% for your earnings between £100,000 and £125,140. If you’ve ever heard people talking about the 60% tax bracket (a band which doesn’t officially exist), this loss of the Personal Allowance is what they’re referring to.
This may all sound a little confusing, but here’s an example to show you how it works in principle:
- Sally is earning £100,000, and is given a £500 pay rise.
- This extra £500 will be taxed at the higher rate (40%), just like everything else that Sally earns above £50,271.
- However, for every £2 she earns over £100,000, Sally now loses £1 of her tax-free Personal Allowance. This means that £250 of her Personal Allowance now needs to be taxed at her normal 40% higher rate.
- 40% of £250 is £100, so she will now pay that extra tax on top of the normal 40% higher rate of tax she pays on her earnings above £100,000, which in this case would be £200.
- All in all, Sally is paying £300 more in tax (£100 + £200) since receiving her £500 pay rise.
- This equates to 60% of the money she earns above £100,000.
- So, while Sally is still technically only in the ‘higher rate’ tax band, she is effectively being taxed on 60% of her earnings above £100,000.
- However, this cycle won’t go on forever, as if Sally starts earning £125,140 at some point in the future, she will have lost all her Personal Allowance and will begin being taxed at the normal additional rate (45%) for all her earnings above that, with no more Personal Allowance to lose.
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How to be tax efficient when earning over £100k
For those in the fortunate position of earning £100,000 or above, you should be aware of the options available to keep some of your savings or donations free from the higher and additional tax rates.
For example, consider setting up an Individual Savings Account (ISA) or Lifetime ISA, as these government initiatives reduce your taxable income while helping you put more money into your savings. You will pay no tax on the interest or dividends you receive from these savings accounts.
The government also offers tax allowance and deductions for people in particular circumstances to help reduce taxable income, such as a marriage allowance (if you’re married) or deductible expenses (if you’re self-employed), so it’s well worth looking into these as well.
It’s also important to contribute to your pension - not just to help secure your financial future, but to reduce the income you are taxed on now. In the UK, all pension contributions are tax-free, so it’s important to contribute a percentage of your earnings each month to your pension, and to find out whether your employer offers a matching contribution scheme.
In addition to offering pension contributions, some employers may also offer salary sacrifice schemes, which let you swap part of your salary for non-taxable benefits like childcare vouchers or additional pension contributions.
Last but not least, be aware that as a higher earner, you can claim the difference between the rate of tax you pay and the basic rate on any Gift Aid donation - a win-win situation for both you and the charity you’re donating to.
Filing a tax return as a high-earner
Previously, if you earned over £150,000, you had to file a tax return. However, from 2024/25, high earners won’t need to file a tax return if they are only on PAYE and have no other streams of income.
Understanding the tax implications of earning over £100k
We hope this article has helped to demystify the tax implications of earning over £100k. We know it’s a confusing topic, but it’s worth taking the time to understand the basics. No matter how much you’re earning, you should understand how the UK tax system works, which tax band you fall into, and the options that are available to you to become more tax efficient. This will ensure you’re optimising your financial wellbeing in the present and saving for your and your family’s future.
If you have recently entered into a new tax bracket, we recommend seeking professional advice from a tax expert or financial advisor who can help with your specific circumstances. They can guide you through the intricacies of the tax system, ensuring that you maximise all available tax benefits and reap the rewards - along with handling the responsibilities - of earning over £100k.
