What is the 60% tax trap, and how does it work?
If you’re a higher-rate taxpayer, defined as those earning between £50,271 and £125,140 annually, you may be hit by a stealthy 60% tax bill. This is because your personal allowance, which is £12,570 for the 2024/25 tax year, begins to fall when you earn over £100,000.
Higher Taxes Next Year
Workers could be hit with up to £4,000 in additional taxes next year due to changes announced in the Budget. Chancellor Rachel Reeves revealed in October that higher capital gains tax rates (CGT), reduced dividend allowances and frozen income tax thresholds will come into effect from the next tax year in April.
These three tax alterations will impact workers of all salary brackets, but could see top earners shelling out nearly £4,000 extra in taxes by 2025. CGT is a tax on the profit made when you sell or ‘dispose of’ an asset that’s appreciated in value, such as a second property or stocks and shares.
It’s the gain you make that is taxed, based on your income tax bracket. Analysis suggests that those earning £100,000 and above will bear the brunt of these changes, facing a total capital gains tax increase of £3,836 next year.
For higher-rate taxpayers, the CGT rate on gains made above the £3,000 tax-free threshold has risen from 20% to 24%. This means the CGT liability on a gain of £5,000 is now £480 – up from £400 under the 20% rate.
Consequently, on gains of £10,000, £20,000, and £50,000, the CGT liability would rise to £1,680, £4,080, and £11,280, respectively. Workers earning £50,000 face a tax hike of £1,831 next year, while those on average wages also face significant increases with people earning £35,000 set to pay an extra £1,261.
In a major shake-up to the Capital Gains Tax (CGT) rates, basic-rate taxpayers will now face an increased rate of 18% on gains exceeding the £3,000 tax-free threshold, up from the previous 10% rate. This translates to a higher CGT liability of £360 on capital gains of £5,000, compared to the previous £200.
For gains of £10,000, £20,000, and £50,000, the CGT liability will now increase to £1,260, £3,060, and £8,460 respectively.
Additionally, the Personal Allowance remains unchanged at £12,570 until April 2028. With wage inflation currently at 4.8%, this freeze will push more workers into higher tax brackets, with HMRC data revealing an additional 100,000 workers have been pulled into the 60% tax bracket.
