Higher Rate Taxpayer: What Happens To Your Personal Allowance?

A personal allowance is how much income you can earn each year before you have to start paying income tax.

Currently, the personal allowance is £12,570 if you earn less than that, you won’t usually have to pay income tax.

If you’re a higher earner or you owe tax from a previous tax year, your personal allowance will decrease.

It’s worth pointing out that your personal allowance might be increased if you claim the marriage allowance or blind person’s allowance.

You fall into the higher-rate taxpayer bracket when you earn between £50,271 – £125,140.

This means that the amount of money you earn in this bracket will be taxed at 40%. (It doesn’t apply to all of your earnings!)

Here’s how it breaks down:

You earn a total of £55,000 each tax year you’ll pay:

• 0% tax on the first £12,570
• 20% tax on your earnings between £12,571 – £50,270
• 40% tax on your earnings between £50,271 – £55,000

So, in total, you’re only paying the 40% tax rate on £4,729 of your earnings.

For people earning over £100,000, the personal allowance of £12,570 reduces by £1 for every £2 over £100,000.

This means that you’ll be taxed at a rate of 60% for the amount over £100,000.

So if you earn £100,000 and get a £1,000 bonus, you’ll only keep £400 of the additional money as income.

If you earn £125,140, you don’t get a personal tax-free allowance and pay tax on everything you earn.

Some of the strategies to help reduce higher-rate income tax include:

• Maximising tax-efficient accounts: tax-efficient accounts, including a Cash ISA or Stocks and Shares ISA can help reduce the amount of tax you pay on savings and investment growth
• Claim pension tax relief: higher-rate taxpayers can claim back an additional 20% in pension tax relief
• Use your allowances: schemes like the marriage allowance could help you to increase how much income you can earn tax-free