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Comment by neilv | Hacker News Reader

> over the £100k mark which here in the UK is a trap which means you pay 62% tax rate on every £ over 100k until £125k where it drops back to 47% for every £ over.

What's the rationale for having the tax rate drop at £125k? (Rather than stay flat or increase.)

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It is a stupid hidden tax thing. They don't tax the first 12.5K of income, if it is below 100K. They start reducing that 12.5K limit as your income goes up, for every £2, it reduces by £1.

So, if you earn 100K, the first 12.5K of your income is not taxable

If you earn 105K, the first 10K is not taxable

If you earn 125K, there is no non taxable amount.

So the tax rate gets applied two times, that's why the strange thing between 100K and 125K happens

Whoa, and I thought that our French taxes were complicated. At least it is always more taxes:)

It also effects your eligibility for free pre-school child care, which is worth £9000 /year to effected people. As you are paying 50% ni and income tax from 80 to 100, you are better off earning 80k than 100k.

You can get around this with salary sacrifice pension, which can push your pre tax income down bellow the critical levels. But most employers refuse to offer it.

At a small company, you might be able to make them do it.

Yeah completely forgot about this angle too. Losing 780 hours per year of free child care per child really racks up.

You get significantly punished for breaching that 100k. So if you’re going to tip over, you needs to smash through it.

Because the tax-setting authorities aren't competent, and it's a politically-sensitive thing to mess with

It happens in the US with how fed, state taxes interact with social security and Medicare (income capped)

yeh that's wrong, its 40% on everything between £50,271 to £125,140, and 45% on everything above that

https://www.gov.uk/income-tax-rates

“You may have been thinking that the highest rate of income tax payable was 45%, at which point the rate of National Insurance is 2%, giving an effective tax rate of 47%.

But did you know you could be subject to an effective combined rate of income tax and national insurance of 62% if you earn over £100,000?

The 62% tax trap refers to the income band falling between £100,000 and £125,140 on which the employed or self-employed will effectively experience an income tax rate of 60% alongside national insurance contributions of 2%.

This is because for every £2 you earn over £100,000 per annum, you lose £1 worth of your £12,570 tax-free personal allowance. Your tax rate only reduces to the additional rate of 45% after the entirety of your personal allowance for that year has been eroded, i.e. on income above £125,140.”

Source: https://www.theprivateoffice.com/insights/have-you-fallen-vi....

huh! I'm wrong!

I found this easier to understand

https://taxscouts.com/high-earner-tax-returns/60-tax-what-to...

Note that the rates are different in Scotland too.

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