Many people assume the highest rate of income tax in the UK is 45%. In reality, for a growing number of higher earners, there is a hidden tax band where the effective rate is closer to 60%. This is often referred to as the “60% tax trap”, and it typically affects people earning between £100,000 and £125,140.
It catches a lot of people by surprise, often after a pay rise or bonus, when the extra income doesn’t feel nearly as rewarding as expected. The good news is that, with the right planning, it’s a problem that can often be managed, or even avoided altogether.
What is the 60% Tax Trap?
The tax trap is caused by the tapering of the personal allowance. Normally, everyone can earn £12,570 each year without paying income tax. However, once your income goes above £100,000, this allowance starts to be reduced.
For every £2 you earn over £100,000, you lose £1 of your tax-free allowance. By the time your income reaches £125,140, the allowance is gone completely.
Because you’re also paying 40% higher-rate tax in this income range, the loss of the personal allowance creates an effective tax rate of 60% on that slice of income.
A Simple Example of the 60% Tax Trap
Imagine your salary increases from £100,000 to £110,000.
- The extra £10,000 is taxed at 40%, costing £4,000.
- At the same time, you lose £5,000 of your personal allowance.
- That £5,000, which was previously tax-free, is now taxed at 40%, costing another £2,000.
So out of the £10,000 pay rise, £6,000 goes to HMRC. You keep just £4,000. That’s where the 60% figure comes from, and why the trap feels so painful.
Why it Matters!
The 60% tax trap matters for two main reasons.
First, it’s unexpected. It isn’t shown as an official tax band, so many people only discover it when their take-home pay doesn’t rise as expected, or when a tax bill arrives.
Second, more people are being pulled into it. Tax thresholds have been frozen for several years, while wages and bonuses have continued to rise. As a result, people who never considered themselves “very high earners” are now being affected.
It can also have knock-on effects. For example, if either parent earns over £100,000, the family can lose access to tax-free childcare and funded childcare hours, which can significantly increase household costs.
What Can be Done?
This is where planning makes a real difference. The aim isn’t to turn down income, but to use it more efficiently.
Pension contributions are often the most effective solution. Contributions reduce your taxable income, which can bring you back below the £100,000 threshold. In effect, you’re redirecting income that would have been taxed at 60% into your pension instead.
When done correctly, this can feel like getting exceptionally generous tax relief, while also strengthening your long-term retirement position. Salary sacrifice arrangements, where available, can be particularly powerful.
Charitable giving through Gift Aid can also help. Gift Aid donations reduce your adjusted income for tax purposes, and higher-rate taxpayers can reclaim additional relief. This can be a good option for those who already give to charity or want to support causes they care about.
Salary sacrifice benefits, such as additional pension funding or certain workplace benefits, may also reduce taxable income in a tax-efficient way.
In some cases, timing matters. Where income is flexible, for example, bonuses, dividends, or self-employed profits, spreading income across tax years can prevent unnecessary exposure to the 60% band.
What Can be Done?
The challenge with the 60% tax trap isn’t understanding it, it’s coordinating the right response.
Pension allowances, carry-forward rules, cash-flow needs, bonuses, benefits and family circumstances all interact. A decision that saves tax today can create problems elsewhere if it isn’t properly planned.
This is where good financial advice earns its keep. We help clients:
- Spot the issue before it becomes a surprise
- Model different options and their consequences
- Avoid unintended problems, such as exceeding pension allowances
- Make decisions that support both short-term cash flow and long-term goals
Final thoughts
The 60% tax trap sounds alarming, but it doesn’t have to be. With the right planning, it can often be turned into an opportunity, particularly to strengthen pension provision and improve long-term outcomes.
As always, tax rules depend on individual circumstances and can change over time. This article is intended as general information, not personal advice. If you think this issue might affect you, or someone you know, a conversation at the right time can make a meaningful difference.
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