A CLIENT once told me he believes there is no such thing as good luck in business, only good results driven by commitment, hard work and drive.

To a large extent, I agree. Notwithstanding the odd bit of serendipity, success – more often than not and especially in the world of owner-operated businesses – is earned.

The result of that success can be a salary north of £100k, and while that can bring privilege and access to the finer things in life, it can also lead to some serious tax-based headaches.

I’m talking about the 60% tax trap, and yes, it can be as horrendous as it sounds. Most people won’t have heard of it, after all, according to HMRC, income tax is charged at 0%, 20%, 40% or 45%, depending on how much you earn.

The rates are slightly different in Scotland, but a 60% rate of tax doesn’t seem to exist.

However, higher-rate taxpayers beware.

If there is one word to describe the UK tax system, it is ‘complicated’. It is easy to misinterpret the rules, and end up making some expensive mistakes, if you fall into one of the hidden tax ‘sinkholes’

A prime example is the 60% income tax trap. It is not published in any HMRC guidelines because it is an unofficial effective rate of income tax.

It occurs as a result of the tapering of the personal allowance for higher earners. The result? Those earning between £100,000 and £125,140 can end up paying 60% tax.

But how does it happen?

If you earn £100,000 or more, the £12,570 personal allowance – the amount of income you can earn each year without paying income tax – is slowly reduced.

It is currently tapered away at a rate of £1 for every £2 you earn above £100,000.

In hard terms, this means that for every £100 of income between £100,000 and £125,140, you only get to take £40 home – £40 is deducted in income tax, while another £20 is lost by the tapering of the personal allowance.

This amounts to a 60% tax rate.

There are measures you can put in place to mitigate the 60% trap, the most simple of which is to increase the money you pay into your pension. Do this and you are saving on income tax, whilst boosting your retirement fund.

Before you take action, however, the most sensible step is to contact me or a member of the Rachael Bell Wealth Management team for advice.

Tax rules are complicated and, as we have seen several times this year, can change frequently.

We are always up to speed with the latest changes and that means we have always got your back.

We will flag any changes that could impact – positive or negative – your personal finances, and help you decide what action to take.

The value of a pension with St. James’s Place will be directly linked to the performance of the funds selected and the value may therefore fall as well as rise.  You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.