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For income band of £100,000 to £123,700, the effective rate of tax is 60%. It is made up of a higher rate of 40% and lost personal allowance (1/2*40%)=20%. Kindly explain this part “lost PA (1/2*40%)=20%”
The reduction in the PA is explained in chapter 2, section 4 of the OT Notes and the accompanying lecture – have you studied this?
Yes, I did, but I did not find a discussion of this rate in the reduction of PA topic. Other rates are mentioned but not 60% one. Kindly guide me on this.
For every £2 of income between 100,000 and 123,700 the PA is reduced by £1 – therefore for every £2 of additional income in this band the taxable income of the taxpayer increases by £3 – this extra taxable income will be taxed at 40% which will mean that tax will be £1.20 (40% x £3) on what is just £2 of extra income.
£1.20 is 60% of £2 – hence an effective rate of tax in this band of income of 60%
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