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‘Bizarre anomaly’ – 60% tax rate – not news

15th October 2013

The Times reports today that thousands of people will be paying an effective 60% rate of income tax from next April, in a quirk of the tax system (remember, it is one of the most complicated in the world).

It comes about by the way that the personal allowance – the tax-free amount you can earn each year – is reduced by £1 for every £2 you earn over £100,000, meaning that earners between £100,000 and £118,880 are paying an effective rate of 60%.

The reality of the system is, that this is not news – tax professionals have been aware of it for years, and there are methods of planning to avoid this effective tax rate (for example, contributing to your pension). The Times also correctly points out that since the personal allowance is increasing to £10,000 from April 2014, and (possibly – see the announcement this week of Tory plans) to £12,500 in the near future, that the top of that band will increase to £120,000.

The real scandal, however is two-fold. Firstly, the £100,000 hard cap has not been adjusted for inflation since it was brought in, and secondly, the basic rate band – where your income is taxed at 20%, has been reduced year on year. These two factors have pushed more and more people into paying higher tax rates – either into the effective 60% band, as mentioned above, or into the higher rate band, at 40%.