Ben Peacock
Chartered Financial Planner
On paper, reaching a six-figure salary should feel like a milestone. Yet the moment your income moves above £100,000; you can find yourself caught in the '60% income tax trap'. It is a threshold that quietly reduces your take home pay, affecting thousands of high earners every year.
The encouraging news is that this income tax trap can often be avoided with the right planning.
What is the 60% Income Tax Trap?
The issue centres on the personal allowance taper.
Most individuals in the UK receive a tax-free personal allowance of £12,570. Once your income rises above £100,000, that allowance begins to taper. For every two pounds you earn above the threshold, you lose one pound of personal allowance.
When your income reaches £125,140, the allowance disappears entirely. Earnings within this band are effectively taxed at 60 per cent because you pay higher rate income tax at 40 per cent while also losing your tax-free allowance at the same time.
It is a distorted and often overlooked part of the UK tax system.
A Quick Example
Imagine your income increases to £110,000.
The extra £10,000 appears at first to be taxed at 40 per cent, which would create a £4,000 tax bill. In reality, you lose £5,000 of your tax-free personal allowance at the same time, exposing more of your earnings to basic-rate income tax.
Your total tax on the extra £10,000 becomes £6,000. You also lose access to 30 hours of free childcare each week. This is the 60 per cent income tax trap in practice.
Why the Income Tax Trap Matters
It Is Easy to Trigger
A bonus, interest on your savings, rental income, dividends, or a modest business profit can nudge you over the threshold. So can “benefits in kind” (P11D) such as a company car or private medical insurance. Many people only discover the impact when reviewing their tax return.
How to Reduce Your Exposure
Your aim is to reduce your adjusted net income. HMRC uses this figure to assess how much of your personal allowance you can keep.
Pension Contributions
Personal pension contributions are one of the most effective ways to mitigate the 60 per cent tax trap. They reduce your adjusted net income and attract tax relief. They can also bring your income back below the taper point while strengthening your long-term retirement plans.
Salary Sacrifice Pension Arrangements
If your employer offers salary sacrifice for pension contributions, this is worth exploring. You agree to a lower salary and your employer contributes the equivalent sum into your pension. This reduces your taxable income and may protect your personal allowance.
From April 2029, salary sacrifice pension contributions above £2,000 per annum will attract national insurance contributions, but they remain a tax-efficient strategy for people subject to the taper.
Elect for other Salary Sacrifice Benefits
Many employers allow you to sacrifice salary for additional benefits, such as childcare vouchers, cycle-to-work schemes or purchase additional annual leave. This reduces your taxable income as well as providing access to valuable perks.
Charitable Donations
Make charitable donations through Gift Aid. This increases the value of your charitable giving and lowers your adjusted income.
Considering the Timing of Income
Where you can control the timing of dividends or bonuses, review whether they fall within the same tax year. Adjusting the timing can help you stay below the personal allowance taper.
Review Structure of non-earned Income Sources
You may be able to reduce your non-earned taxable income by reorganising your savings, investments, or other income sources. This could help you stay below the taper threshold.
Working with an Adviser
Income rarely remains static. A good adviser will help you understand where you stand, model potential scenarios and build an approach that supports both your short and long-term goals.
Why Early Action Matters
Once the tax year closes, your ability to adjust your position becomes limited. Early planning gives you more options and usually leads to better outcomes.
Frequently Asked Questions
What Is the 60% Tax Trap in the UK?
The 60 per cent tax trap applies to income between £100,000 and £125,140. Within this range, the personal allowance tapers away and creates a marginal tax rate of 60 per cent. You are also liable to national insurance on these earnings and can lose access to 30 hours of free childcare per week.
What Is the Personal Allowance Taper?
It is the gradual reduction of your personal allowance once income exceeds £100,000. For every two pounds earned above that point, one pound of allowance is withdrawn.
How Can I Avoid the UK 60 Per Cent Tax Trap
You can reduce your adjusted net income through pension contributions, salary sacrifice pension arrangements, Gift Aid donations or by managing the timing of certain income.
Is Salary Sacrifice a Good Way to Reduce Tax?
Salary sacrifice often works well for those close to the taper threshold because it reduces taxable income and maximises annual allowance while increasing pension savings at the same time.
Let Us Talk It Through
If your income is close to the £100,000 threshold, or has recently moved above it, this is the right moment to review your position. A few timely adjustments can make a meaningful difference.
We are always happy to talk it through with you.
Disclaimer
The content on this page does not constitute financial advice.
A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change.
The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. You should seek advice to understand your options at retirement.
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