Q. What is the highest rate of income tax in the UK?

A. Most believe that 45 per cent is the highest rate. Actually, there’s a quirk in the system meaning those with an income between £100k and £125k fall prey to a 60 per cent tax rate!

The basic rules for the tax year 2019/20 are on income up to £12,500 no tax is payable because each individual is entitled to a Personal Allowance. However, when your taxable income reaches £100k, for every £2 over that you lose £1 in Personal Allowances.

The higher rate threshold at which tax is charged at 40 per cent also falls in step with the PA, meaning that not only are you taxed at 40 per cent on the additional £1, you also pay an extra 20 per cent per £1 lost, resulting in the marginal rate of 60 per cent.

If your income is, say, £101k then on the additional £1k you’ll lose £500 of your PA and so l effectively pay a staggering £600 tax on that £1k (that is, £1k at 40 per cent plus £500 of lost allowances at 40 per cent equating to an overall rate of 60 per cent).

This continues for taxable income up to £125k (£100k plus £12.5k x 2) when the whole of the PA has been clawed back and the marginal Income Tax rate drops back to 40 per cent. This may seem complicated but for those in this bracket, it’s worth further consideration as there are steps to mitigate the situation. The key is considering your personal taxation position, seeking good advice and planning ahead.