How to avoid the "60% tax trap"

Question

I do understand that, past the £100k income threshold, one gradually loses her personal allowance at the rate of £1 every £2 earned.

With this fiscal year's figures, the personal allowance is £11,850 if you earn less than £100,000 and 0 if you earn £123,700 or above, linearly varying inbetween.

Supposing one earns exactly £123,700 to make things easier, the take home pay would be £75,021.88 (according to salarycalculator.co.uk), meaning that roughly 39.35% goes to the taxman.

One of the advertised solution to avoid this so-called "tax trap" seems to be that of keeping the taxable income just under £100k by (if possible) contributing to the pension before tax.

Is the above the only solution to avoid being taxed at this higher rate? Does it make sense for any income greater than £100k?

Answer 1

It depends on the exact conditions in which you are generating that income. But, to the best of my knowledge, the two classical ways of reducing/alleviating income tax in the UK are:

• (For permanent/full-time employees)Using salary sacrifice when possible: This can be done, e.g. by contributing to an employer pension.

• Setting up your own limited company, billing your clients through it, and then paying yourself minimum wage + dividends (dividends are taxed at a lower rate).

As to whether this makes sense or not... it depends on your financial situation. For example, locking away money in a pension is a great idea in terms of tax efficiency - but you need to be willing to wait until you are 55 to reap the benefits.