Understanding tax thresholds:
What business owners need to know
The UK Income Tax system has become a bit of a minefield over the years, making it harder for business owners to navigate. To help cut through the confusion, we’ve outlined the key tax thresholds you need to be aware of—so you can plan ahead with confidence and avoid any unexpected surprises.
What happens when you earn over £50,270?
Once income exceeds £50,270, you will start to incur Income Tax at the higher rate, this is 40% for non-savings (your earnings from PAYE/self-employment or rental income) and savings income and 33.75% for dividend income.
What happens if you earn between £60,000 and £80,000?
In addition to paying Income Tax at the higher rates, there could be a further impact on your finances if you claim Child Benefit.
If you’re the higher earner in your household with an income over £60,000, the High Income Child Benefit Tax Charge will start to apply. HMRC claw back the payment at 1% of your child benefit for every £200 of income between £60,000 and £80,000.
If your income reaches £80,000, your Child Benefit will be fully repaid to HMRC through the additional tax charge.
For an income between £100,000 and £125,140
Once your income goes over £100,000, your tax-free Personal Allowance of £12,570 starts to reduce. For every £2 you earn above this threshold, you lose £1 of your allowance. By the time your income reaches £125,140, your allowance will have fully tapered to nil.
In real terms, this means that for every £100 of income between £100,000 and £125,140, you take £40 home, £40 is deducted for Income Tax, while another £20 is lost due to the tapering of your Personal Allowance. The effective rate of tax on non-savings income between £100,000 and £125,140 is 60%.
Tax-free childcare and free childcare hours are valuable benefits for families, but once your income goes over £100,000, you’ll no longer be eligible—potentially costing you thousands each year. If you’re nearing this threshold, planning ahead can make a big difference. If you’re unsure how this might impact you, then get in touch, we’re here to help.
For income in excess of £125,140
Once your income goes over £125,140, you’ll lose your tax-free Personal Allowance completely. From this point, your earnings will be taxed at higher rates—45% for non-savings and savings income, and 39.35% for dividend income.
If you’d like to understand more about UK tax traps and how they might affect you, our Tax Team is here to help. We can guide you through structuring your income in a way that makes sense for both your tax position and your financial goals. Feel free to reach out if you’d like to chat.
