The 60% Tax Trap & How to Reduce It
Why earners between £100,000–£125,140 face a 60% effective marginal tax rate — and the legitimate strategies to reduce or eliminate it.
Earning over £100,000? Without planning, you could be paying an effective 60%+ marginal rate. Pension contributions can recover this in full.
What is the 60% Tax Trap?
The 60% effective tax rate trap affects individuals earning between £100,000 and £125,140. Here's why: For every £2 you earn above £100,000, you lose £1 of your Personal Allowance (currently £12,570). By the time your income reaches £125,140, your Personal Allowance has been completely withdrawn. This means the income between £100,000 and £125,140 is effectively taxed at: • 40% income tax on the additional earnings, PLUS • 40% income tax on the loss of the Personal Allowance that would have sheltered other income Total: 60% effective marginal rate on earnings in this band.
How the Maths Works
Example: You earn £110,000. • Income over £100,000: £10,000 • Personal Allowance reduced by: £5,000 (£10,000 ÷ 2) • Tax at 40% on the £10,000: £4,000 • Tax at 40% on the lost £5,000 allowance: £2,000 • Total extra tax: £6,000 on £10,000 of earnings = 60% effective rate This is before considering National Insurance (8%), which brings the total marginal rate to approximately 68% on earnings in this band.
Who is Affected?
You are in the 60% tax trap if: • Your adjusted net income exceeds £100,000 • This includes salary, self-employment income, dividends, rental income, and savings interest • Benefits in kind (company car, private medical insurance) also count towards adjusted net income • Bonus payments can push you unexpectedly into this band Approximately 1.4 million people are estimated to have income over £100,000 and are affected by this issue.
Strategy 1: Pension Contributions
The single most effective strategy to escape the 60% trap is to make pension contributions: • Pension contributions reduce your "adjusted net income" — the figure used to taper the Personal Allowance • A £10,000 contribution for someone with £110,000 income reduces adjusted net income to £100,000 — fully restoring the Personal Allowance • Effective tax relief: 60% on contributions in this band • This applies to contributions to a personal pension (SIPP, stakeholder pension) or salary sacrifice through your employer Annual pension contribution limit: £60,000 (or 100% of UK earnings, whichever is lower). Carry forward rules allow up to three years of unused allowance.
Strategy 2: Salary Sacrifice
Salary sacrifice reduces your gross salary for tax purposes: • Your employer reduces your salary by an agreed amount and pays it directly to a pension scheme, electric vehicle lease, or other qualifying benefit • This reduces your adjusted net income, potentially restoring your Personal Allowance • Employer NI savings can sometimes be shared with the employee • Common salary sacrifice arrangements: pension contributions, cycle-to-work scheme, electric vehicles, childcare vouchers (legacy scheme) Note: Salary sacrifice reduces pensionable pay, which may affect defined benefit pension entitlement, life insurance, and mortgage affordability calculations.
Strategy 3: Gift Aid Donations
Gift Aid donations also reduce adjusted net income: • The grossed-up value of Gift Aid donations (donation × 100/80) is deducted from your adjusted net income • A £8,000 Gift Aid donation reduces adjusted net income by £10,000 • This can bring your income below £100,000 and restore the Personal Allowance • Unlike pensions, you do not receive the money back — but charities you care about benefit • Higher-rate relief is claimed via Self Assessment
Strategy 4: Timing Income
Where you have control over when income is received, timing can help: • Defer a bonus to the following tax year if it pushes you into the trap • For company directors: defer dividend payments to avoid exceeding £100,000 in a given year • Accelerate deductible expenses into the current year to reduce adjusted net income • Split income with a spouse or civil partner where legally possible (e.g. dividends on jointly held shares) These strategies require forward planning and ideally should be reviewed before the tax year-end.
The Trap at a Glance
Top Strategies
- →Pension contributions (SIPP/salary sacrifice)
- →Gift Aid donations
- →Defer bonus to next tax year
- →Dividends timing for directors
- →Shift income to lower-earning spouse
Earning Over £100,000?
We can model the exact savings from pension contributions and other strategies for your situation.
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