What is the Additional Rate of Tax?
The additional rate of tax is the highest rate of tax payable in the UK.
You start paying additional rate tax if you earn more than £125,140.
All individuals receive a personal allowance which gives you some tax free income up to the personal allowance threshold.
If you start earning above £100,000 you will lose £1 of the personal allowance for every £2 of income you earn above £100,000 up to £125,140.
This means that after the additional rate tax threshold has been reached you will not have any personal allowance left.
Additional rate taxpayers also lose access to the personal savings allowance (PSA) which allows some interest from savings to be tax free.
What is the additional tax rate?
A 45% rate of tax will be applied to your income if you become an additional rate taxpayer.
Income after your tax free personal allowance will be subject to tax at three different rates (after the personal allowance) with the additional tax rate being the highest.
The rates at which income tax will be payable are:
- Tax free personal allowance: Income up to £12,570 at 0%.
- Basic rate of tax: £12,571 to £50,270 at 20%.
- Higher rate of tax: £50,271 to £125,140 at 40%
- Additional rate of tax: from £125,140 at 45%.
What is the additional tax rate threshold?
The additional rate of tax threshold starts at £125,140 and is applicable to all taxable income above that level.
You will only need to pay the additional rate of tax from when the additional rate threshold starts.
Before the additional rate threshold the amount of tax charged will be staggered as per the tax bands above so you won’t need to pay additional rate tax on all of your income.
Is additional rate tax the same as higher rate?
The additional rate of tax should not be confused with the higher rate of tax which is lower and set at a rate of 40%.
Additional rate taxpayers will pay some tax at the higher rate of 40% which is in the preceding tax band.
Additional rate tax and self assessment
Additional rate taxpayers don’t always need to complete a self assessment tax return.
HMRC expects you to complete a self assessment tax return if your earn £150,000 or more so if your income is below that and you don’t have any other reason to submit a tax return you should be exempt from self assessment.
Additional rate taxpayers tax relief
Tax relief being given at the 45% additional rate of tax can bring some financial support to additional rate taxpayers.
HMRC allows tax relief to be given at the highest rate of tax depending on the type of relief being claimed.
Claiming back tax relief at the rate of 45% is a tax efficient way of reducing your tax bill and getting some tax free income.
Some valuable tax reliefs available to additional rate taxpayers include:
Pension tax relief
Taxpayers at the higher rate have the entitlement to claim an additional 25% tax relief on their pension contributions, which gives them a total of 45% tax relief.
This matches the 45% tax they are required to pay on earnings above the additional income tax rate threshold.
Work related expenses tax relief
For employed additional rate taxpayers under PAYE claiming tax relief on work expenses like business mileage travelled in your own car will be given at 45%.
Charitable giving tax relief
Payroll giving is a way of contributing to your chosen charity if you’re a taxpayer through the pay as you earn system.
The tax relief on your donation is applied immediately as your employer or pension payer deducts it before calculating and subtracting your tax and is given at your top tax rate.
Giving to charity through the gift aid scheme allows additional rate tax payers to claim tax relief on the donation. The amount you can claim is essentially the gap between your top tax rate and the basic tax rate, providing additional rate taxpayers with an extra 25%.
