Are you paying the 62% tax rate?

It continues to surprise me that many people are still oblivious to the fact that there is a 62% marginal rate of income tax out there which from a report I’ve just read affects some 700,000 people.  Actually, no, it doesn’t surprise me – since the 62% rate was introduced a few years ago and went completely under the radar with most of the popular media, who were far more wrapped up in the 50% rate being introduced for income in excess of £150,000.  What’s more – even though the headline catching 50% rate was reduced to 45% from April 2013, this affected the 62% rate not one jot.

What am I talking about? – the fact that if you currently earn between £100,000 and £120,000 you will be paying some 60% income tax on that slice of income.  Add 2% employees’ NIC and you get 62%.  If you’re thinking that the rate of income tax is 40% up to £150,000 then think again.  Yes, 40% will be the rate shown on your tax return or your payslip, but for every £1 you earn above £100,000 you will lose 50 pence of your tax-free personal allowance (currently £10,000) – equating to a 60% marginal rate of tax between £100,000 and £120,000.  If you’re an employer and you give someone a bonus or pay-rise from £100,000 to £110,000, they will get to keep just £3,800.  We haven’t even mentioned the employers’ NIC that must be paid as well – your £10,000 bonus will have actually cost the company £11,380 but your key employee will have pocketed less than £4k of this – hardly the incentive or reward you thought you were providing.

As I mentioned above, I’m still convinced that an awful lot of people don’t fully appreciate the impact of the 62% rate of tax.  The mathematics is not that complex, but this tax measure simply gets very little air-time even though this affects so many more people than the 50%/45% supposed “top” rate (by the way, top rate payers are equally affected by this, it’s just that there is very little they can do about it). The 62% rate does provide some interesting planning opportunities.  Certainly the timing of bonuses and/or pay reviews should be carefully considered – for example, dropping two bonuses inadvertently into the same tax year could be a very costly mistake – someone earning £80,000 one year and £120,000 the next will pay some £4,000 additional tax compared to someone who earns £100,000 in each of the same two years.  If you are an employer you might consider other forms of staff incentivisation in and around this earning bracket – for example pension contributions or tax efficient share option plans.

Finally, you’ll have gathered that the 62% band widens each time the personal allowance increases – and the political will over the last few years has seen the personal allowance rise beyond the rate of inflation.  The 62% rate is therefore not going away, in fact it’s likely to become even more of a nuisance.

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