UK Income Tax System Exposed! | Personal Allowance Trap | 60% Marginal Tax Explained
How under the UK tax system you could end up paying 60% income tax due to the personal allowance trap! Employees are granted a personal allowance (currently £12,500 in 2020 / 2021), however, if you earn above a certain threshold this personal allowance is reduced meaning you end up paying a marginal tax rate of 60% on a portion of your income.
Once your salary exceeds £100,000 your personal allowance will reduce by £1 for every £2 you earn. This means if you earn £125,000 your personal allowance is reduced to £0. It also means that the £12,500 that you could have previously earned tax free, will instead be taxed at 40% by the HMRC!
There are over 1 million people in the earning over £100,000 per year, however, there is very little exposure of the government's marginal tax rate of 60% that applies to earnings from £100,000 to £125,000.
The Personal Allowance and Tax Band Thresholds for 2020 / 2021 are listed below:
• Personal allowance for 2020/2021 = £12,500 (0%)
• Basic rate = £12,501 to £50,000 (20%)
• Higher rate = £50,001 to £150,000 (40%)
• Additional rate over = £150,000 (45%)
These example calculations show how you would end up paying £15,000 income tax on the first £25,000 you earn over £100,000.
Jeremy Earns £100,000 Per Year...
• Personal Allowance = £0 to £12,500 (0%) = £0
• Basic rate = £12,501 to £50,000 (20%) = £7,500
• Higher rate = £50,001 to £100,000 (40%) = £20,000
Total Income Tax £27,500
Boris Earns £125,000 Per Year...
• Personal Allowance Not Applicable
• Basic rate = £0 to £37,500 (20%) = £7,500
• Higher rate = £37,501 to £125,000 (40%) = £35,000
Total Income Tax £42,500
The extra £25,000 creates a tax liability of £10,000 (at 40%), however, the loss of the personal allowance means another £5,000 becomes due on that £12,500 (£15,000 Tax on £25,000 Income = 60% Marginal Rate)
Видео UK Income Tax System Exposed! | Personal Allowance Trap | 60% Marginal Tax Explained канала Honest Money
Once your salary exceeds £100,000 your personal allowance will reduce by £1 for every £2 you earn. This means if you earn £125,000 your personal allowance is reduced to £0. It also means that the £12,500 that you could have previously earned tax free, will instead be taxed at 40% by the HMRC!
There are over 1 million people in the earning over £100,000 per year, however, there is very little exposure of the government's marginal tax rate of 60% that applies to earnings from £100,000 to £125,000.
The Personal Allowance and Tax Band Thresholds for 2020 / 2021 are listed below:
• Personal allowance for 2020/2021 = £12,500 (0%)
• Basic rate = £12,501 to £50,000 (20%)
• Higher rate = £50,001 to £150,000 (40%)
• Additional rate over = £150,000 (45%)
These example calculations show how you would end up paying £15,000 income tax on the first £25,000 you earn over £100,000.
Jeremy Earns £100,000 Per Year...
• Personal Allowance = £0 to £12,500 (0%) = £0
• Basic rate = £12,501 to £50,000 (20%) = £7,500
• Higher rate = £50,001 to £100,000 (40%) = £20,000
Total Income Tax £27,500
Boris Earns £125,000 Per Year...
• Personal Allowance Not Applicable
• Basic rate = £0 to £37,500 (20%) = £7,500
• Higher rate = £37,501 to £125,000 (40%) = £35,000
Total Income Tax £42,500
The extra £25,000 creates a tax liability of £10,000 (at 40%), however, the loss of the personal allowance means another £5,000 becomes due on that £12,500 (£15,000 Tax on £25,000 Income = 60% Marginal Rate)
Видео UK Income Tax System Exposed! | Personal Allowance Trap | 60% Marginal Tax Explained канала Honest Money
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