Earning over £100k – Tax Planning & Compliance Implications

If an individual in the UK earns over £100,000 a year before tax, several important tax planning and compliance implications exist. While an exciting career milestone and achievement, high income must be appropriately planned for.

How much Income Tax will you pay if you earn over £100k?

The UK’s Income Tax rules dictate that generally speaking, the more money you earn, the more Income Tax is payable to HMRC. This is determined by the UK’s Income Tax bands, as shown below.

A taxable income of £100k will see you fall under the Higher Rate of Income Tax (40%). This means all income over £50,271 and below £125,140 will be taxed at 40%. The remaining Income (between £12,571-£50,270) will be taxed at the Basic Rate of 20%.

Individuals in the UK receive a Personal Allowance of £12,570 – this is the amount of money they can earn without needing to pay any Income Tax.

Please note that individuals in Scotland have different Income Tax rates and bands.

Your personal allowance will change when you earn over £100k

In principle, all individuals receive a personal allowance; however, the more money you earn over £100k, the less you will benefit from it.

Once income exceeds £100k, the individual’s Personal Allowance will gradually reduce at a rate of £1 for every £2 that they earn above the £100k threshold.

What is the “60% Tax Trap”?

The “60% Tax Trap” refers to the gradual reduction of the Personal Allowance that occurs when earning over £100k. It means for every £2 earned between £100,000 and £125,140, an individual will pay 40% income tax while losing 50p of their allowance. This equates to an effective tax rate of 60%. That is before National Insurance Contributions are taken.

National Insurance Contributions (NICs) when earning over £100k

National Insurance Contributions are another vital consideration, particularly for high earners. For most individuals, Class 1 National Insurance rates are as follows:

Entitlement to state pension and other contribution-based benefits is retained for earnings between £123 and £242 per week.

Other tax considerations to be aware of

While Income Tax and National Insurance Contributions are the most significant taxes an individual earning over £100k will be exposed to, there are others to consider.

High-income child benefit charge

The High-Income Child Benefit Charge (HICBC) reduces the amount of Child Benefit a family receives if one parent (or their partner) earns above a certain threshold.

As of April 6, 2024, the threshold is set at £60,000 of adjusted net income. This means income after certain deductions are applied. The charge is 1% of the total Child Benefit received for every £200 of adjusted net income that goes over £60,000.

The maximum you can be charged is the total amount of Child Benefit you receive. So, if your income is high enough, the benefit gets cancelled entirely.

HMRC collects the HICBC through self-assessment.

Do you need to complete a self-assessment tax return?

Previously, individuals earning over £100,000 had to register for Self-Assessment and submit a tax return to determine their total tax liability for the year.

However, from the 2023-24 tax year, the need to file a tax return only applies to individuals earning more than £150,000. That said, individuals with multiple income sources may still benefit by registering for Self-Assessment, regardless of their taxable income.

What tax planning options may be available?

As you can see from this article, an individual’s tax obligations can become considerably more complex (and more expensive) once they earn above £100k.

The good news is that there are several significant tax planning opportunities to reduce some of this burden.

• For starters, Individual Savings Accounts (ISAs) or Lifetime ISAs allow you to save a limited amount of money each year without paying tax on interest or dividends.
• For the self-employed, deductible expenses can be used to reduce taxable income.
• Pension contributions may be an efficient way to reduce the income you're taxed on.
  • It is recommended that you check if your employer offers a matching contribution scheme or salary sacrifice for benefits like childcare vouchers or more pension contributions.
• Higher earners can also claim tax relief on charitable donations through Gift Aid, benefiting them and the charity.
• It’s recommended that a claim for Child Benefit is made if eligible even if you are liable to the high-income charge. You can elect to reduce the amount paid to nil whilst still receiving the additional benefits of claiming.

Always seek qualified advice

Whether you have recently started earning over £100k, expect to in the near future, or have been already for some time, seeking qualified advice to plan effectively for tax is highly recommended.

The Shorts tax compliance and planning teams can review your situation and ensure you take advantage of every planning opportunity available while staying fully compliant with HMRC.

Contact our team today if you’d like to discuss your situation.