Many high earners are finding that crossing the £100,000 income threshold doesn’t always mean taking home more money – these are the common traps to avoid.
Two thirds of high earners are financially worse off after crossing the £100,000 income threshold due to a ‘tax trap’. A study of 500 six-figure earners revealed that 67% of them lose money, paying an effective 60% marginal tax rate and losing an average of £2,900.63 a year.
The findings, commissioned by financial services app Plum, highlighted that confusion over the regulations is a major problem. Six in ten confessed they were ‘baffled’ about the tax implications. Additionally, 25% consider the rules for those earning above £100,000 are hard to understand. As a result, 61% fear they might be losing out financially.
The research showed 42% believe they lost money through not grasping the tax rules, while 38% attribute it to being unaware of the tax thresholds .
Personal tax, savings, and pensions were the most confusing areas, resulting in 82% seeking advice. But one fifth said most of what they were advised on seemed conflicting and hard to understand.
Will Bryant, director of wealth strategy at Plum, said: “Many assume that earning more simply means taking home more, without realising how sharply their tax position can change once certain thresholds are breached.
“By the time they notice, they’re already paying more than they expected or missing opportunities to plan more efficiently.”
The study found 59% boosted their pension contributions after exceeding the £100,000 income mark. The primary motivation for this was to save more for retirement (58%), though 29% were eager to lower their tax bill.
Will continued: “Despite the ongoing uncertainty and confusion, the good news is that this is exactly the point at which independent advice and research can make the biggest difference.
“With the right guidance, high earners can understand their new position, plan ahead, using tax wrappers, like pensions, and make informed decisions rather than reactive ones.
“Seeking advice early isn’t about avoiding tax – it’s about removing uncertainty and making sure success doesn’t come with unnecessary financial stress.”
FOUR SIMPLIFIED TAX TRAPS TO WATCH OUT FOR WHEN EARNING ABOVE £100,000
Personal Tax Allowance
Personal Tax Allowance Once you earn over £100,000 per year, your personal tax allowance starts reducing – for every £2 you earn over this figure you will lose £1 of your tax-free allowance until it runs out when you earn more than £125,140.
Savings Tax
You will get taxed on savings after your personal allowance is fully tapered away – high earners of over £125,140 who don’t put their savings in a tax wrapper (like an ISA) will automatically be subject to tax on the interest they earn as they become ‘additional rate taxpayers’.
‘Lifestyle Creep’
The ‘Lifestyle Creep’ will still leave you with the same disposable income as before – as your salary increases you will naturally ‘upgrade’ your lifestyle, such as more expensive cars or properties, but these things will eat into your disposable income leaving you with the same, if not less, as your previous salary.
Lose of Benefits
You will lose out on benefits – these include tax-free childcare, free childcare hours, and child benefits, unless you take actions to reduce your adjusted net income, for example, paying more into your pension.
