The Manual - How to avoid 60 per cent tax

The national debt now stands at a whopping £927 billion, £15,000 for every man, woman and child in the UK. Repaying this debt is the reason higher taxes will kick in from April next year.

Those with income above £150,000 now pay 50 per cent income tax. But there is another group that pays even more. If your income is between £100,000 and £112,950 you will pay income tax at an effective rate of 60 per cent! The reason for this is that you begin to lose your personal allowance once your income exceeds £100,000. Your 'personal allowance' is the first £6,475 of your income that is normally tax-free. The allowance is withdrawn at a rate of £1 for every £2 of income over £100,000. So, by the time your income reaches £112,950, you have lost your whole personal allowance of £6,475.

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But don't fear. It is possible to reclaim your personal allowance with some basic financial planning. Simply by paying a pension contribution, your taxable income is cut by the same amount.

If you earn £105,000, your personal allowance is cut by £2,500. But a £5,000 payment into your pension effectively reduces your income by £5,000 to £100,000, meaning that you keep your whole personal allowance intact, reducing your tax bill.

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Even better, if your employer allows you to sacrifice part of your earnings in return for a pension contribution, you can save some national insurance too. High earners will pay 2 per cent national insurance on the top slice of their income from April 2011. By swapping some of your income for a pension payment, you can save income tax, restore your personal allowance and save some national insurance too.

By John Lawson, Head of pension policy at Standard Life

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