In the 2022/23 tax year, over half a million taxpayers paid a marginal income tax rate of 60%, a 23% increase from the previous year. This marginal rate affects individuals with an adjusted net income between £100,000 and £125,140. As income exceeds £100,000, the £12,570 personal allowance is reduced by £1 for every additional £2 of income, becoming fully reduced at £125,140.

How to Mitigate the Impact

Adjusted net income is defined as an individual’s total taxable income minus personal pension contributions and charitable donations made under Gift Aid. These payments can effectively counteract the 60% tax rate. For instance, an £80 donation under Gift Aid is grossed up to £100, reducing taxable income by £100 and saving £60 in tax for those within the £100,000 to £125,140 income bracket.

If your projected income for 2024/25 is £105,000, consider making an additional pension contribution of £5,000 before 5 April 2025. This would reduce your income to £100,000, therefore restoring the £12,570 personal allowance.

Such planning is also beneficial for those affected by the high-income child benefit claw back charge (HICBC), which reduces child benefit by 1% for every £200 of adjusted net income over £60,000, up to £80,000.

Salary Sacrifice Arrangements Can Also Be Effective

Another effective approach is salary sacrifice. You could agree with your employer to forgo part of your salary, pay rise, or bonus in exchange for additional employer pension contributions or an electric company car. For example, if you earn £96,000 a year and are eligible for a £10,000 bonus, you might ask to have £6,000 of the bonus paid into your pension (tax-free, as long as you stay within the £60,000 annual pension allowance), keeping your income at £100,000 and preserving your personal allowance.

Sacrificing salary for an electric company car isn’t quite as tax efficient, as you will be taxed on just 2% of the car’s list price. For a £50,000 electric car, this results in a £1,000 taxable benefit, translating to £400 income tax for a 40% taxpayer.

Salary sacrifice also provides the employing company with a tax deduction for the cost of the benefit and savings on employer National Insurance, making it beneficial for both parties.