If you earn more than £100,000, you could find yourself in an unexpected situation where you’re charged an effective rate of 60% tax on a portion of your earnings.
This is due to a quirk of the Income Tax system that affects more people than you might expect. According to Unbiased, the number of individuals caught by this ‘tax trap’ has jumped 45% in just two years.
If you’re affected by the ‘60% tax trap’, a financial planner can work with you to explore various strategies to help mitigate its impact. Read on to discover how.
Your Personal Allowance tapers on earnings over £100,000
For the 2025/26 tax year, most people have a Personal Allowance of £12,570. This is the amount of income you don’t have to pay any tax on.
However, once your income exceeds £100,000, your Personal Allowance tapers at a rate of £1 for every £2 over the threshold. This tapering effect means that by the time your income reaches £125,140, your Personal Allowance is gone completely.
This creates an effective Income Tax rate of 60% on your earnings between £100,000 and £125,140.
For example, if you earn £110,000, you’re £10,000 over the threshold. This means you lose £5,000 of your Personal Allowance, due to the tapering. That lost allowance is then taxed at the additional rate of 40%, costing you £2,000. On top of that, the £10,000 above the threshold is itself taxed at 40%, which costs another £4,000.
So, in total, you pay £6,000 of tax on £10,000 of income, leaving you with just £4,000. In other words, you’ve paid an effective rate of 60%.
Thankfully, you can do something about it.
Three ways you can avoid the 60% trap
1. Increase your pension contributions
The simplest way is to increase your pension contributions. Because contributions are usually deducted before tax, they lower the portion of your income that could otherwise fall into the trap.
For example, imagine you receive a £1,000 pay rise, pushing your income from £100,000 to £101,000. If you accept this as extra salary, you’ll pay £600 of that £1,000 in tax.
However, if you diverted the extra £1,000 into your pension, you’d keep your Personal Allowance and receive 40% tax relief on your contribution, meaning you’d keep the entirety of your pay rise.
That said, this approach isn’t always the right one.
If you’re already close to your Annual Allowance, making additional contributions may not be the most efficient use of your income. In this case, other strategies – see below – may be more suitable.
2. Explore salary sacrifice options
Salary sacrifice involves giving up a portion of your salary in exchange for a non-cash benefit, reducing your total taxable income. Common options include financial protection, childcare, gym memberships, and healthcare.
For example, if you earn £105,000 and choose to sacrifice £5,000 for childcare, your taxable salary drops back to £100,000. This preserves your Personal Allowance, reduces your overall tax liability, and allows you to retain more of your income while still receiving valuable benefits.
A financial planner can help identify the most effective salary sacrifice options based on your circumstances and ensure they align with your wider financial goals.
3. Donate money to charity
Donating part of your wealth to charity can help reduce your income and manage the tapering of your Personal Allowance, though you won’t receive the income through other benefits.
If you donate through Gift Aid, your contribution automatically receives 20% tax relief, which boosts the donation. If you’re a higher- or an additional-rate taxpayer, you can also claim back an extra 20% or 25%, respectively, on top of this.
Unlike pension contributions or salary sacrifice, charitable donations don’t give you back the income in another form, though you do receive the higher- or additional-rate tax relief. The real advantage is that giving to charity lets you support causes close to your heart while also making your wealth more tax-efficient. It’s a feel-good double-whammy!
A financial planner can help you avoid the 60% tax trap
An Amber River financial planner can help you weigh up the options and find the most efficient way to protect your income from the 60% trap, while ensuring you keep your long-term goals on track.
To set up an initial appointment, please call 0800 915 0000, or use our contact form to arrange an appointment.
Disclaimer
The information within this article was correct at the time of publishing, but laws and tax rules are subject to change. Your circumstances and where you live in the UK may also have an impact on your tax treatment.
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