Tax Glossary

Additional Rate Tax

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Last updated on:
March 17, 2024

The additional rate tax represents the highest tier of Income Tax in the UK, applicable to individuals whose earnings exceed £125,140 annually.

Understanding Income Tax in the UK

Income Tax is levied on individuals earning above £12,570 annually. The initial £12,570 of income is exempt from tax, recognized as the Personal Allowance. However, for earnings surpassing £100,000 annually, the Personal Allowance reduces by £1 for every £2 above this threshold.

The Income Tax rates for the 2023/24 fiscal year are structured as follows:

  • Earnings up to £12,570 are taxed at 0% (Personal Allowance).
  • Earnings between £12,571 and £50,270 are taxed at 20% (Basic Rate).
  • Earnings between £50,271 and £125,140 are taxed at 40% (Higher Rate).
  • Earnings above £125,141 are subjected to a 45% tax rate (Additional Rate).

Illustration of the Additional Tax Rate

For the 2022/2023 tax year, the additional rate of 45% is charged on incomes exceeding £125,140. For instance, an annual income of £170,000 places you in the additional rate taxpayer bracket, incurring a 45% tax on income above £125,140. The tax breakdown for this scenario would be:

  • 45% on the portion exceeding £125,140 (£44,860)
  • 40% on the next segment of income (£99,730)
  • 20% on the first £50,270 of income

In Scotland, the additional rate rises to 47% for earnings above the same £125,140 threshold.

When does the tax rate effectively reach 60%?

Earning over £100,000 triggers a reduction in the Personal Allowance, diminishing by £1 for every £2 of income over this amount. Although the 45% tax rate does not apply until earnings exceed £125,140, the effective tax rate can feel like 60% within the range of £100,000 to £125,140 due to the phased loss of the Personal Allowance. This situation often creates confusion around tax liabilities for high earners, highlighting the importance of understanding the nuanced impact of income levels on tax rates and allowances.

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