You will normally be paying tax at the 40% income tax rate if your income less tax allowances exceeds £35,000 and at the additional rate, 50%, on any of your taxable income that exceeds £150,000. There are special tax rates that apply to company dividend income.
Additionally, your Personal Allowance reduces when your income is above £100,000 – by £1 for every £2 of income above the £100,000 limit. This reduction applies irrespective of age. As the basic personal allowance is £7,475 for 2011-12, when your income exceeds £114,950 this tax allowance is eliminated.
Income under £100,000
If your income is under £100,000 you should not lose any of your personal tax allowance and none of your top-sliced income will be taxed at 50%.
Income between £100,000 and £114,950
In this income range you are progressively losing a tax allowance and paying tax at 40% on the top sliced £14,950. The combined tax suffered is therefore a significant 60%.
Income over £150,000
Will all be taxed at 50%
Ironically, therefore, if you want to adopt strategies to reduce your taxable income, it is not those with income over £150,000 that stand to save tax at the highest rate. Instead it is those with income between £100,000 and £114,950 where the possible tax savings are at a rate of 60%.