Two thirds of high earners lost money when they crossed over the £100,000 threshold, a study revealed.
Research of 500 six-figure earners found 67 per cent were financially worse off because of the ‘tax trap’ which sees them pay an effective 60 per cent marginal tax rate - losing an average of £2,900.63 a year.
Of these, 42 per cent put their money loss down to not understanding the tax rules, while 38 per cent believe it was because they weren’t aware of the tax thresholds.
Not adjusting pension contributions in time (36 per cent), assuming someone else was handling it (31 per cent), and not depositing savings into a tax wrapper (27 per cent) were among other reasons.
It also emerged 61 per cent felt they were ‘baffled’ about the tax impact when entering the higher tax bracket. With 65 per cent claiming they were overwhelmed by the information when they first crossed the threshold, according to the data commissioned by financial services app, Plum.
Personal tax (50 per cent), savings (37 per cent), and pensions (27 per cent) were the most confusing areas at first, resulting in 82 per cent seeking advice. But 22 per cent said most of what they were advised on seemed conflicting and hard to understand (20 per cent).
Will Bryant, director of wealth strategy at Plum, said: "Many people don't know what to do with their finances when they enter the higher tax bracket - let alone the amount of people who don't know how their savings are impacted.
“Many assume that earning more simply means taking home more, without realising how sharply their tax position can change once certain thresholds are breached.
“The result is confusion, unexpected bills and a feeling that their finances are suddenly out of control, despite doing ‘well’ on paper.
“And by the time they notice, they’re already paying more than they expected or missing opportunities to plan more efficiently.”
The study also revealed 59 per cent increased their pension contributions since exceeding an income of £100,000 - while 16 per cent reduced them.
The main reason for doing this was to save more for retirement (58 per cent), but 29 per cent were keen to reduce their tax bill.
Of those who didn’t change their pension contribution, 56 per cent thought it wouldn’t make much difference. However, 23 per cent were unsure about what to change.
The OnePoll.com data also found 25 per cent believe the UK rules for people earning over £100,000 are difficult to follow. While 61 per cent worry they might be missing out financially because they don’t fully understand the tax system for high earners.
Will from Plum added: “It’s encouraging to see so many people are increasing pension contributions in the wake of exceeding the six-figure income, as it shows some awareness of how taxation works with this salary.
“Benefits like childcare vouchers and free hours are based on adjusted net income which takes into account pension contributions.
“Despite the ongoing uncertainty and confusion, the good news is that this is exactly the point at which independent advice and research can make the biggest difference.
“With the right guidance, high earners can understand their new position, plan ahead, using tax wrappers, like pensions, and make informed decisions rather than reactive ones.
“Seeking advice early isn’t about avoiding tax - it’s about removing uncertainty and making sure success doesn’t come with unnecessary financial stress.”
FOUR SIMPLIFIED PITFALLS WHEN EARNING OVER £100,000
1. Once you earn over £100,000 per year, your personal tax allowance starts reducing – for every £2 you earn over this figure you will lose £1 of your tax-free allowance until it runs out when you earn more than £125,140.
2. You will get taxed on savings after your personal allowance is fully tapered away – high earners of over £125,140 who don’t put their savings in a tax wrapper (like an ISA) will automatically be subject to tax on the interest they earn as they become ‘additional rate taxpayers’.
3. The ‘lifestyle creep’ will still leave you with the same disposable income as before – as your salary increases you will naturally ‘upgrade’ your lifestyle, such as more expensive cars or properties, but these things will eat into your disposable income leaving you with the same, if not less, as your previous salary.
4. You will lose out on benefits – these include tax-free childcare, free childcare hours, and child benefits, unless you take actions to reduce your adjusted net income, for example, paying more into your pension.
