You probably already know that the UK tax system is based on various bandings, depending on how much you earn. In the lowest band (the ground floor of an imaginary high-rise building), up to £12,570 is tax-free. Above that, and up to £50,270, you’ll pay the basic rate; and past this, up to £125,140, you’ll pay a higher rate. On the top floor, towering above £125,140, you’ll have to pay what’s known as the additional rate.

But did you know that there’s a slightly sneaky “invisible” floor in there too? At £100,000 things start to get interesting.

Although it’s not often advertised, the £100,000 threshold is one of the most important to be aware of. That’s because if you earn over this amount, you can ultimately say goodbye to 60% of the excess. So, on earnings of £110,000, you’d pay an additional £6,000 in tax, thanks to the final £10,000.

But why is this? Surely the top rate of tax is 45%?

While this is technically true, if you earn between £100,000 and £125,140, HMRC has introduced a rather painful quirk. It’s described as an ‘abatement of your personal allowance’, which in simpler terms means that you start to lose your tax-free allowance. Your 0% tax rate becomes a 40% tax rate, which (when you do the sums) effectively equates to a 60% tax rate on anything in this band. And, with so many dentists earning around this point, it’s a real problem.

It sounds confusing, but the main thing is to be aware of it, so that you can successfully avoid it. This really comes down to proper planning. The good news is that there are various options to consider, from employing family members and investing in equipment to buying a new electric vehicle. If you haven’t already incorporated, this could be a good next step – as well as bringing a whole host of other benefits including tax relief, incorporation allows us to plan your dividends in line with your personal finances. Paying pension contributions is also helpful, as this raises the £100,000 banding.

These actions all make a difference – but they can only be done in real time. When a new financial year begins, there will be no way to affect the previous year’s tax bill. It’s also worth noting that you can only claim tax-free childcare if your income is below £100,000; and if 30 free hours is worth £7,000 per year, when you’re earning between £100,000 and £125,140 you could suffer to the tune of £22,000, or nearly 90%. On top of this, Corporation Tax is now banded, too. Rather than a flat rate for all of 19%, the top tier of tax has risen to 25%.

So, as we approach the annual deadline, do stop and think. If you’ve worked with us for a while, you’ll know that we proactively assess and suggest solutions during the current financial year, rather than delivering bad news. This collaborative pre-planning can help with the tax you’re exposed to, but if you’re new to us, or you’ve left it too late this time around, even final steps will make a big impact. The key is to act now, before the deadline of April 5th. Just get in touch to get started.