What happens when your salary goes over £100k?
12th June, 2023
It wasn’t all that long ago that salaries/incomes of over £100,000 a year remained a rather rarefied occurrence. But the number of people earning a higher base salary and bringing in a total income over £100k has increased significantly since the millennium. Six-figure remuneration packages can now be found in most sectors, including the public sector, but even a high base with commissions or bonus payments can take you into £100k territory.
Whilst breaking the £100k mark can still feel like a personal career high, it’s worth being aware of the tax implications of being in the top 2% of the UK’s earners throughout the tax year.
What are the tax implications of earning over £100K?
Looking at the table below (concerning the current tax year from April 6th 2023 to April 5th 2024), you might be fooled into thinking that there is no discernible difference in your tax rate for earning £100,000. The reason for this is that it would suggest you remain in the higher rate bracket and will continue to pay 40% on earnings between £50,271 and £125,140. But what this does not show is an effective 60% (40% + 20%) rate which begins to take effect once you pass the £100,000 mark.
At this point HMRC starts reducing your annual allowance, effectively increasing the rate of tax between £100k and £125k by 20%. Under this rule, your personal allowance is reduced by £1, for every £2 of earnings over £100,000. So, if you would normally receive the full personal allowance** but your income is £100,002, then your personal allowance reduces to £12,499 and so on for each additional £2 income. This means that you begin paying basic rate tax at 20% on each £1 lost from your allowance.
|Up to £12,570||0%||Personal Allowance|
|£12,571 to £50,270||20%||Basic Rate|
|£50,271 to £125,140||40%||Higher Rate|
|Over £125,140||45%||Additional Rate|
*This table is the correct information from 12/6/23. Tax rates are liable to change in the annual budget each year so please check the prevailing rates at the time of reading.
**Please also be aware that £12,570 is the starting personal tax allowance and does not reflect any reductions in your personal circumstances from BIK/P11D restrictions e.g., company car, private medical etc.
£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 altogether, putting you on basic rate tax for the first £50k of income. Furthermore, there is a further hike for income beyond £150k as this is when the additional rate kicks in, raising the underlying rate to 45%.
Needless to say, there are points at these boundaries of income whereby staying £1 under the threshold appears more attractive than going £1 over.
Bigger Tax Bills
For those enjoying an income of £100k plus for the first time, the lustre can soon vanish when the first tax bill arrives. Even with the advances in Real Time Information (RTI) and Making Tax Digital (MTD), which are designed to reduce the latency between earnings and correct taxation, it can still take the tax code system a while to catch up, landing taxpayers with a hefty and often unexpected tax bill and higher payment on account for the following year.
If the increased income is a bit of a bubble, then you can make a claim to reduce your payment on account for the following year if your income is likely to decrease again.
Benefits of income over £100k
Reading this article, it probably feels like hitting the magic £100k marker can sound like more of a problem than a good thing, but there are positive takeaways. One such positive is that breaching £100k is a good time to focus on the future and carry out some very effective pension contributions as the government will effectively pay 60% of any contribution.
But of course, the biggest positive is that you’ve earned it and that puts you in the top 2% of earners in the UK if you are male and the top 1% for women. That in itself is quite an achievement and one you should enjoy, regardless of the salary sacrifice due to your taxable income.