3 ms·

> over the £100k mark which here in the UK is a trap which means you pay 62% tax rate on every £ over 100k until £125k where it drops back to 47% for every £ ov

by neilv 2y ago

> over the £100k mark which here in the UK is a trap which means you pay 62% tax rate on every £ over 100k until £125k where it drops back to 47% for every £ over. What's the rationale for having the tax rate drop at £125k? (Rather than stay flat or increase.)

dukeyukey 2y ago
Because the tax-setting authorities aren't competent, and it's a politically-sensitive thing to mess with
joelanman 2y ago
yeh that's wrong, its 40% on everything between £50,271 to £125,140, and 45% on everything above that https://www.gov.uk/income-tax-rates https://www.gov.uk/income-tax-rates
- ManchesterDev 2y ago
  “You may have been thinking that the highest rate of income tax payable was 45%, at which point the rate of National Insurance is 2%, giving an effective tax rate of 47%. But did you know you could be subject to an effective combined rate of income tax and national insurance of 62% if you earn over £100,000? The 62% tax trap refers to the income band falling between £100,000 and £125,140 on which the employed or self-employed will effectively experience an income tax rate of 60% alongside national insurance contributions of 2%. This is because for every £2 you earn over £100,000 per annum, you lose £1 worth of your £12,570 tax-free personal allowance. Your tax rate only reduces to the additional rate of 45% after the entirety of your personal allowance for that year has been eroded, i.e. on income above £125,140.” Source: https://www.theprivateoffice.com/insights/have-you-fallen-victim-62pc-tax-trap#:~:text=The%2062%25%20tax%20trap%20refers,national%20insurance%20contributions%20of%202%25 https://www.theprivateoffice.com/insights/have-you-fallen-vi....
  - joelanman 2y ago
    huh! I'm wrong! I found this easier to understand https://taxscouts.com/high-earner-tax-returns/60-tax-what-to-do-if-you-just-started-earning-over-100000/ https://taxscouts.com/high-earner-tax-returns/60-tax-what-to...
- thebruce87m 2y ago
  Note that the rates are different in Scotland too.
carllerche 2y ago
It happens in the US with how fed, state taxes interact with social security and Medicare (income capped)
actuator 2y ago
It is a stupid hidden tax thing. They don't tax the first 12.5K of income, if it is below 100K. They start reducing that 12.5K limit as your income goes up, for every £2, it reduces by £1. So, if you earn 100K, the first 12.5K of your income is not taxable If you earn 105K, the first 10K is not taxable If you earn 125K, there is no non taxable amount. So the tax rate gets applied two times, that's why the strange thing between 100K and 125K happens
- BrandoElFollito 2y ago
  Whoa, and I thought that our French taxes were complicated. At least it is always more taxes:)
- shubb 2y ago
  It also effects your eligibility for free pre-school child care, which is worth £9000 /year to effected people. As you are paying 50% ni and income tax from 80 to 100, you are better off earning 80k than 100k. You can get around this with salary sacrifice pension, which can push your pre tax income down bellow the critical levels. But most employers refuse to offer it. At a small company, you might be able to make them do it.
  - ManchesterDev 2y ago
    Yeah completely forgot about this angle too. Losing 780 hours per year of free child care per child really racks up. You get significantly punished for breaching that 100k. So if you’re going to tip over, you needs to smash through it.

by neilv 2y ago

dukeyukey 2y ago

Because the tax-setting authorities aren't competent, and it's a politically-sensitive thing to mess with

joelanman 2y ago

yeh that's wrong, its 40% on everything between £50,271 to £125,140, and 45% on everything above that https://www.gov.uk/income-tax-rates https://www.gov.uk/income-tax-rates

ManchesterDev 2y ago
“You may have been thinking that the highest rate of income tax payable was 45%, at which point the rate of National Insurance is 2%, giving an effective tax rate of 47%. But did you know you could be subject to an effective combined rate of income tax and national insurance of 62% if you earn over £100,000? The 62% tax trap refers to the income band falling between £100,000 and £125,140 on which the employed or self-employed will effectively experience an income tax rate of 60% alongside national insurance contributions of 2%. This is because for every £2 you earn over £100,000 per annum, you lose £1 worth of your £12,570 tax-free personal allowance. Your tax rate only reduces to the additional rate of 45% after the entirety of your personal allowance for that year has been eroded, i.e. on income above £125,140.” Source: https://www.theprivateoffice.com/insights/have-you-fallen-victim-62pc-tax-trap#:~:text=The%2062%25%20tax%20trap%20refers,national%20insurance%20contributions%20of%202%25 https://www.theprivateoffice.com/insights/have-you-fallen-vi....
- joelanman 2y ago
  huh! I'm wrong! I found this easier to understand https://taxscouts.com/high-earner-tax-returns/60-tax-what-to-do-if-you-just-started-earning-over-100000/ https://taxscouts.com/high-earner-tax-returns/60-tax-what-to...
thebruce87m 2y ago
Note that the rates are different in Scotland too.

carllerche 2y ago

It happens in the US with how fed, state taxes interact with social security and Medicare (income capped)

actuator 2y ago

It is a stupid hidden tax thing. They don't tax the first 12.5K of income, if it is below 100K. They start reducing that 12.5K limit as your income goes up, for every £2, it reduces by £1. So, if you earn 100K, the first 12.5K of your income is not taxable If you earn 105K, the first 10K is not taxable If you earn 125K, there is no non taxable amount. So the tax rate gets applied two times, that's why the strange thing between 100K and 125K happens

BrandoElFollito 2y ago
Whoa, and I thought that our French taxes were complicated. At least it is always more taxes:)
shubb 2y ago
It also effects your eligibility for free pre-school child care, which is worth £9000 /year to effected people. As you are paying 50% ni and income tax from 80 to 100, you are better off earning 80k than 100k. You can get around this with salary sacrifice pension, which can push your pre tax income down bellow the critical levels. But most employers refuse to offer it. At a small company, you might be able to make them do it.
- ManchesterDev 2y ago
  Yeah completely forgot about this angle too. Losing 780 hours per year of free child care per child really racks up. You get significantly punished for breaching that 100k. So if you’re going to tip over, you needs to smash through it.