What happens when your salary goes over £100k?
Not too long ago, earning a salary or income exceeding £100,000 a year was considered a rare achievement. However, since the turn of the millennium, a significant rise in individuals with a base salary surpassing this six-figure mark has been observed across various sectors, including the public domain. It's not just about high base salaries; commissions and bonus payments can propel one into the £100,000 income realm.
While reaching the £100,000 milestone may be a personal career triumph, it's crucial to be cognizant of the tax implications associated with being among the top 2% of earners in the UK throughout the tax year.
Tax Implications for Earning Over £100K: Examining the table below, applicable for the current tax year from April 6th, 2023, to April 5th, 2024, it may initially seem that there is no discernible difference in tax rates for earning £100,000. This is because it appears that you remain in the higher rate bracket, paying 40% on earnings between £50,271 and £125,140. However, what this doesn't reveal is an effective 60% rate (40% + 20%) that takes effect once you surpass the £100,000 threshold.
Beyond this point, HMRC initiates a reduction in your annual allowance, effectively raising the tax rate between £100k and £125k by 20%. According to this rule, your personal allowance decreases by £1 for every £2 of earnings over £100,000. Consequently, if your income is £100,002, your personal allowance reduces to £12,499. This results in paying basic rate tax at 20% on each pound lost from your allowance.
Please note that tax rates may change in the annual budget, so verify prevailing rates at the time of reading.
£125k Income Removes Your Personal Allowance: The cumulative impact of the reduction in your personal allowance is that an income of £125k effectively wipes out your personal allowance, subjecting the first £50k of income to basic rate tax. Additionally, there's a further increase for income beyond £150k, triggering the additional rate and elevating the underlying rate to 45%.
Bigger Tax Bills: For those experiencing an income of £100k and above for the first time, the initial excitement may wane when confronted with the first tax bill. Despite advancements in Real Time Information (RTI) and Making Tax Digital (MTD) aimed at streamlining tax processes, the tax code system may still take time to adjust, leading to unexpected tax bills and higher payments on account for the subsequent year.
If the increased income seems temporary, a claim can be made to reduce the payment on account for the following year, particularly if income is expected to decrease.
Benefits of Income Over £100k: While it might seem from this discussion that crossing the £100k threshold brings more challenges than rewards, there are positive aspects. Surpassing £100k is an opportune time to focus on the future and make effective pension contributions, with the government effectively contributing 60% of any such contribution.
Despite potential challenges, earning over £100k is a significant accomplishment, placing individuals in the top 2% of male earners and the top 1% for women in the UK. Celebrating this achievement is warranted, irrespective of any salary sacrifice due to taxable income.
