Definitely not a bad position to be in if you’re earning over £100,000 a year. But it is important to understand the tax implications if you’re earning over this amount.
A frequently asked question by our users is why they need to fill out a tax return if all of their income comes from their PAYE job… valid question indeed!
The main reason is that, actually, once your earnings go over £100k per annum, you gradually start to lose your personal allowance.
Yup… you read it right! In fact, for every £2 you earn over £100k, you lose £1 of your personal allowance. So, if your personal allowance is £12,500 for the tax year, you lose your personal allowance by the time you reach £125k!
This sounds like a double whammy of tax
A quirk within the tax system, but that is correct. This means you end up paying up to 60% tax between £100k to £125k. Beyond that, as you would have already lost all your personal allowance, you would be taxed a flat 40% up to £150k worth of earnings. Anything above that level is taxed at 45%.
Let’s take a look at an example:
Without the bonus, you wouldn’t have been required to complete a tax return, and your tax bill would have been £25,500.
With the bonus included:
Personal allowance reduced by £5,000, so only £7,500 is tax free.
Next £37,500 taxed at 20%
Remainder of £65,000 taxed at 40%
Can I do anything about this?
There are a couple of ways in which you could be more tax efficient and perhaps plan ahead:
Sounds confusing? Don’t fall foul of HMRC legislation!
If your earnings are more than £100,000 per annum, you must register for and complete a self-assessment tax return. If not already registered to file one, you must do so immediately.