The £100k Salary That's Worth Less Than £80,000: A Plain English Explanation

Imagine your salary increases from £99,000 to £104,000.

Of course, you know you won’t get the full £5,000 to yourself, because you’ll likely lose a chunk of it to income tax and National Insurance.

But there are other losses to factor in too. And if you’re not prepared for them, you’re in danger of falling into the 60% tax trap.

The 60% tax trap

While there is no official 60% tax band in the UK, people who earn over £100,000 can, in effect, see earnings between £100,000 to £125,140 taxed at 60%.

That’s all thanks to an overlap in two different features of the UK tax system:

• The higher rate tax band, and
• The loss of the Personal Allowance

Your Personal Allowance

Aside from a few exceptional cases, all UK earners get a “Personal

Allowance”. This is the amount of income you can earn each tax year before you start paying income tax.

Currently, that’s £12,570.

So, for example:

If you earn £50,000, because the first £12,570 is tax-free, you only pay income tax on the remaining £37,430.

However, once your income passes £100,000, your Personal Allowance starts to diminish. And by £125,140, it’s gone completely.

That means, you end up paying tax on a greater proportion of your earnings.

How much more?

For every £2 you earn above £100,000, you lose £1 of your allowance.

So, although you’ll still officially be paying 40% income tax as a higher-rate taxpayer, your effective marginal income tax rate – the amount you pay on that particular slice of income – becomes 60%.

For many families, the biggest financial impact of earning £100k+ isn’t the tax itself: it’s the loss of childcare support.

If your income goes above £100,000, you could lose access to tax-free childcare and/or funded childcare hours.
Depending on the age of your children, this can add thousands of pounds to your annual childcare costs.

That’s why two families with similar salaries can end up with very different amounts of disposable income.

Alex and Sam are married.

Alex owns a savings account that earns £2,000 of interest each year.

Because Alex is a higher-rate taxpayer, part of that interest may be taxable.

Sam, however, has little savings income and hasn’t used their Personal Savings Allowance.

If some of those savings were genuinely transferred into Sam’s name, more of the interest could potentially be received tax-free.

The same principle can apply to investments that pay dividends or assets that may be sold in the future.

This example is for illustrative purposes only.

In many cases, yes.

One of the biggest tax advantages of being married or in a civil partnership is that assets can often be transferred between spouses without triggering Capital Gains Tax.

This allows couples to rearrange ownership so both people can make use of their tax allowances.

However, the transfer needs to be genuine. The asset must actually become the other person’s, rather than simply being moved on paper while one person continues to control it.

Depending on your circumstances, you may be able to transfer:

• Shares
• Investment funds
• Cash savings
• Some property interests
• Other investments

The tax consequences can vary depending on the type of asset, so larger transfers may be worth discussing with a tax adviser.

Don’t forget your ISA allowances

Every UK adult has their own annual ISA allowance.

That means a married couple or civil partners can potentially shelter twice as much from tax by making use of both ISAs.

For example, if the annual ISA allowance is £20,000 per person, together you could invest up to £40,000 into ISAs during the tax year.

All income and growth that happens inside an ISA are free from Income

Tax and Capital Gains Tax – making it an obvious starting point for investors / savers.

When you sell investments outside an ISA or pension, you may have to pay

Capital Gains Tax on any profits.

Because each individual has their own annual Capital Gains Tax exempt amount, some couples use this feature to transfer investments between themselves before selling them. This can allow couples to double-up on their annual exemption rather than using just one allowance.

It won’t be suitable in every situation, and it has to be a genuine transfer, but it can help reduce the amount of tax you need to pay.

What about pensions?

Pensions can only be owned by the named pension saver, so you can’t transfer an existing pension to your spouse.

However, both spouses can build up their own pension savings and benefit from pension tax relief.

Pension tax relief is a government tax benefit that means some of the money you would have paid in Income Tax is added back onto your pension instead.

Boosting pension contributions for the lower-earning spouse can also be an effective way to build retirement savings as it ensures you are making full use of both individuals’ pension allowances.

Assuming you’re taxed as a couple

In the UK, spouses and civil partners are usually taxed as individuals. That means two separate sets of allowances.

If one person in the partnership has maxed out their allowance, and the other person is under the threshold, there’s a possibility that you could make tax savings by transferring assets.

Forgetting unused allowances

Are you aware of all the allowances you’re entitled to? Is your partner? Reviewing your finances together could shine a light on opportunities to save tax.

Only using one ISA

Each person has their own ISA allowance. Using both can protect more of your savings and investments from tax.

Making transfers after selling

If you’re planning to transfer investments between spouses, it’s often better to do so before selling them. Once an asset has been sold, it may be too late to benefit from both people’s Capital Gains Tax exemptions.

Personal Allowance: The amount of income you can earn before paying Income Tax.

Personal Savings Allowance: The amount of savings interest you can receive before paying tax, depending on your income tax band.

Dividend Allowance: The amount of dividend income you can receive before paying tax on it.

Capital Gains Tax (CGT): A tax you may pay on the profit you make when selling certain investments or assets.

ISA (Individual Savings Account): A tax-efficient account where any interest, dividends and investment growth are generally free from UK tax.