Sole trader writers – don’t get caught out by the 60% tax rate

Published by Louise Ford on

HMRC money

I speak to prospective clients all the time who are completely unaware that we have a stealth tax in the UK which is 60%.

Government like to keep quiet about it.

Look very carefully and if you are earning in the bracket £100,000 to £125,000 then you will be paying 60% tax on this £25,000 slice of income.

This is because once you reach this level of income you lose £1 of your personal allowance for every £2 you earn.  So, you’re already paying 40% tax at this point, but because you lose the 20% tax relief that your personal allowance gives you at this rate the cumulative effect is a 60% rate of income tax.

People are quite rightly shocked to learn this and ask what can they do to avoid it.  Here’s a few ideas:

  1. Be organised and have systems in place which can give you a good idea of what your income in the current tax year is likely to be. It’s only possible to take mitigating action during the tax year in question and not after it has ended.
  2. Make sure you claim for everything you can. Read our Tax Deductions For Writers Guide.
  3. Making pension contributions  will reduce your ‘adjusted net income’ which will get your personal allowance back. This also has the double whammy of increasing your basic rate band. Example: your taxable earnings are £123,000, so you have £23,000 of income taxed at 60% due to the loss of your personal allowance.  If you make a pension contribution of £18,400 (net amount) then this will benefit from basic rate tax relief in your pension making it worth £23,000 (gross amount).  This reduces your ‘adjusted net income from £123,000 to £100,000 and allows you to retain your personal allowance.  It also raises your basic rate band from £33,500 to £56,000 meaning that you pay less tax at 40%
  4. Make a charitable donation – this has the same effect as a pension contribution
  5. Think about delaying work into the next tax year if you feel that your income may be lower in the following year
  6. Creative averaging should also be considered
  7. If you feel that this is going to be an ongoing problem, think about setting up a limited company and trading through this. This would give you the ability to control timing of your income and manage your tax rates.

Categories: Tax