Self Assessment personal tax return

£100k salary and student loans spells extreme tax rates

It has been calculated that some top earners, with a salary in excess of £100k, could end up paying an effective tax rate of more than 90% as a result of the recent changes to the additional rate threshold. In his Autumn Statement cum budget, the Chancellor announced that the point at which the additional rate of income tax (45%) applies, will drop to £125,140 from April 2023. This move will mean that thousands more people are pulled into that tax bracket and within that group it is those with ongoing student loan liabilities that could be penalised the most, through tapered benefits or cliff-edge allowances.

60% Effective Tax Rate over £100k

Those earning between £100,000 and £125,140, already pay an effective tax rate of 60% because the personal allowance – the amount of income you earn before paying any tax – reduces by £1 for every £2 earned over £100k. This means that as well as sitting in the higher rate band and paying 40% on your earnings, you also pay 20% retrospectively on the first £12,570 earned, which would otherwise have remained free of tax.  

Claw back allowances on Student Loans

The extreme levels of tax identified in the research by investment firm, AJ Bell, arise when you move into the 45% additional rate tax band, which will now happen sooner, and have any residual student loans. As well as the additional rate threshold being lowered, the research cites the impact of successive policy changes around student loan repayments and the claw back of certain allowances. The example they provide is of someone earning £124,150 who graduated in the last 10 years and is still paying off their loan. Should that individual receive a £1,000 pay rise, they would pay an effective tax rate on their additional earnings of 93% when you consider the cumulative effect of the additional rate of tax, National Insurance, student loan repayments, reduced personal savings allowances and other reliefs which ‘drop off a cliff’. They (AJ Bell) calculate that an individual could end up with as little at £6.50 in their pocket from that £1,000 pay rise!

Whilst it could be said that the research highlights an issue which will only affect a small proportion of the overall work force, when you look at the number of people earning over £100k, graduates account for a significant percentage and therefore, proportionally, are likely to be those most impacted by the changes.