People invariably believe the highest rate of income tax in the UK is 45% – but that's not actually the case.

A quirk in the system means anyone earning between £100,000pa and £125,140pa could find themselves paying 60% tax on this portion of their earnings.

Why? Because when your taxable income is more £100,000, your £12,570 tax-free personal allowance tapers away at a rate of £1 for every extra £2 you earn. 

In reality, this means for every £100 of income you earn between £100,000pa and £125,140pa, you only get to take home £40. This is because £40 goes to income tax, while another £20 is lost due to the tapering of the personal allowance.

Here's Lyndhurst Financial Management expert James Wyman to explain further

"We are seeing more and more enquiries from high earners with young children," says finance expert James.

"Many think the highest rate of tax they pay is 45%, the truth is it can be significantly higher than this," he says.

The 60% tax trap, where those earning between £100,000 and £125,140 lose some or all of their personal allowance, has always been an issue.

"However, with the government's new free childcare scheme," explains James, he says "we are finding that there is an increasing number of concerned parents who are just missing out on this and well as the tax free childcare account because their earnings breach the upper limit of £100,000pa. "

To give an example, under the new rules, if you have a two-year-old in nursery for 15 hours per week and earn £101,000pa you will not benefit from the 15 hours free childcare or the tax free childcare account - whereas someone earning £99,999 will.

This is the equivalent of £6,500 in benefits lost due to breaching £100,000 in earnings, or this could be viewed as an effective tax rate of 710% on the £1,000 earned over £100,000. 

James says: "There are ways to reduce your income to fall within the range to benefit from the tax free childcare account as well as the new childcare scheme."

"So, if you are affected by this then please do get in contact" adds James.

Why not download your copy of Lyndhurst's guide to tax planning here

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