By Ross Martin, Accountancy Director at Hive Business

In this country if you earn over about £40k you will no doubt be familiar with the fact that you have to pay the maximum tax rate: 42% including NI. But thanks to an amazingly sneaky manoeuvre from HMRC, deftly and quietly executed about five years ago, you will be wrong. And not just a few per cent wrong.

Nowhere is it written in any legislation, but the maximum tax rate is in reality 62%, and I am continually staggered to find a lack of awareness about this fact among those it affects: people paying tax on earnings between £100k and £120k.

If that’s you and you are reading this and your accountant hasn’t told you, their laxness could easily have been costing you £12k a year. They really should have told you about this.

Here’s a simplification of how it works:

• the first £10k of earning is tax free
• the next £30k is taxed at 29% (inc NI)
• the next £60k is taxed at 42% (inc NI)
• at £100k you lose the £10k tax free allowance
• so the next £20k is effectively taxed at 62% (inc NI)

However skilfully this may have been dressed up as a “removal of the personal allowance”, it’s effectively a jump from a 42% tax rate to a 62% tax rate for the segment between £100k and £120k.

Say you earn £120k: for starters, you’ll now pay 29% on the first £10k you earn, basically a surcharge of £2,900. On top of that, the 42% rate kicks in earlier, so you pay £1,300 extra on your earnings between £30k to £40k. That’s already a £4,200 bill for going over £100k. Add to that another £8,400 to pay on earnings between £100k and £120k and you’ve racked up a whopping £12,600 bill on just £20k of earnings – an effective rate of about 62%.

You may as well be living in Finland, at least there the trains work properly.

In many cases people blindly pay up for the simple crime of not being aware of this sleight of hand by HMRC, a trick which, let’s be fair, seems as arbitrarily punitive as it is clever. For people earning quite a lot more than £120k, losing the tax free allowance doesn’t have such a significant impact on their tax bill and, percentage wise, it becomes almost imperceptible for big earners. None of which seems to fit with what most people understand as our progressive tax system, does it?

Fortunately there are alternative things you can do with this £12k rather than incur it as a loss. You could look at it as £12k to divvy out: make a pension contribution, buy something or make an investment. Many of our dental clients, often associates in private practices or small clinic owners, mitigate the loss with tax planning.

The critical thing is to be aware of this strange segment of you tax bill so you can plan for it and, as I mentioned earlier, a staggering number of people in this tax bracket had no idea…

Call Ross on 01872 300232 or email us at hello@hivebusiness.co.uk.