Yes, if your adjusted net income exceeds £100,000, your tax-free Personal Allowance (£12,570 for 2024/25) is reduced by £1 for every £2 earned above this threshold. It is completely withdrawn at £125,140, creating an effective 60% tax rate on income between £100,000 and £125,140.
If you earn more than £100,000
Your personal allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £125,140 or above.
The personal allowance is an income tax-free portion of your income. In the 2024/25 tax year that goes from 6th April 2024 to 5th April 2025, the personal allowance is the first £12,570 of your income. However, if you earn over £100,000 per year, your personal allowance decreases.
At this level, your personal allowance gradually starts to reduce. This is the amount of money you can earn without paying tax, and it's currently set at £12,570 per year. For every £2 you earn over £100,000, you lose £1 of your allowance. By the time you're earning £125,140, there's no personal allowance left.
One of the best ways to avoid 60% tax is to pay into a pension or increase your payments if you're already contributing. By paying more into a pension, you reduce your adjusted net income and can either reduce the amount of personal allowance you lose or even reinstate it fully if your income falls to £100,000 or less.
Your Personal Allowance might be bigger if you claim Marriage Allowance or Blind Person's Allowance. Or it might be smaller if you're a high earner or if you owe tax from a previous tax year.
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Footnotes: [2] Income in excess of £100,000 is subject to both higher rate tax of 40% (£4,000) and will also result in a partial loss of the Personal Allowance, £12,570 in the 2024/25 tax year, which is tapered down by £1 for every £2 of income in excess of £100,000 (see scenario A in table below).
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If Olive puts £10,000 into her pension, she reduces her 'adjusted net income' to £100,000. That means she doesn't lose her personal allowance. She doesn't fall into the tax trap, and she helps grow her pension, which could give her more money in retirement.
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