Tax quirk results in 60% rate for some

The chancellor’s clampdown on tax on the wealthy will leave some individuals paying 60p in every £1 of income over £100,000.

A quirk in the system, designed to gradually reduce personal allowances for wealthy earners, means a number will see a significant increase in their tax bills next year. From April 6, 2010, anyone who earns more than £100,000 will see their personal allowance reduced by £1 for every £2 above the income limit.

Someone on a salary of £100,000 will still receive the full personal allowance and will pay income tax of £29,930 (based on the current personal allowance of £6,475). But individuals earning just above £100,000 will be affected by the new marginal tax rate.

For example, someone who earns £103,000 will lose £1 of personal allowance per £2 over £100,000.

This means not only will they pay 40 per cent income tax on the extra £3,000 but they will lose half that amount in personal allowance and will pay 40 per cent income tax on the extra £1,500. Added together, this means they will pay 60p on every £1 over £100,000.

The anomaly has been called irrational by accountancy firms, although Deloitte points out that the changes will not affect a large number of people.

Wealth managers say they expect many of their clients who fall into the 60 per cent tax bracket to take measures to circumvent the changes, such as increasing charitable contributions.