The 60% Tax Trap & How to Reduce It
Once your income exceeds £100,000, you lose £1 of personal allowance for every £2 earned. By £125,140 your entire allowance is gone — creating an effective 60% tax rate on that band of income.
How the 60% Trap Works
Between £100,000 and £125,140, you pay 40% income tax on earnings plus you lose your personal allowance at a rate of 50p per £1 earned. Each £1 of personal allowance lost costs 40p in additional tax. Combined: 40% + 20% = 60% effective tax rate.
Example: Earning £110,000 means £10,000 is taxed in the trap. You lose £5,000 of personal allowance, costing an extra £2,000 in tax. Total tax on that £10,000 = £6,000.
Strategies to Avoid the Trap
Pension Contributions
Contributing to a personal pension reduces your adjusted net income. A £10,000 pension contribution can save up to £6,000 in tax for those caught in the trap — effectively 60% tax relief.
Gift Aid Donations
Charitable donations via Gift Aid also reduce your adjusted net income. The charity reclaims basic rate tax and you get higher/additional rate relief through self assessment.
Salary Sacrifice
Where your employer offers salary sacrifice for pension, cycle to work, childcare vouchers or EVs, this reduces your gross salary and therefore your adjusted net income.
Defer Income
If your income is close to £100,000, consider deferring bonuses, dividends or other income into the next tax year to stay below the threshold.
Business Expenses
Self-employed individuals and company directors should ensure all allowable expenses are claimed to reduce adjusted net income legitimately.
Spouse / Partner Planning
If your spouse or partner has unused allowances, consider redirecting income-producing assets to them through gifts, changing shareholdings or adjusting salary structures.
Child Benefit Charge — The Same Trap at Lower Incomes
The High Income Child Benefit Charge applies when anyone in the household earns over £60,000, with benefit fully clawed back by £80,000. This creates a similar effective tax rate issue for families claiming Child Benefit. Pension contributions can reduce adjusted net income below these thresholds too.
Escape the 60% Tax Trap
With the right planning, it's possible to legitimately reduce your adjusted net income below £100,000 and reclaim your personal allowance. Book a tax planning session today.
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