The 60% tax trap

Between £100,000 and £125,140, every extra pound is taxed at an effective 60%. Here's why, and what to do.

There is no 60% income tax band. Officially the rates go 20, 40, 45 and stop there.

And yet between £100,000 and £125,140 of income, every additional pound you earn costs you 60 pence — more once National Insurance is counted. It's the highest marginal rate in the UK system, higher than anything paid by people earning ten times as much, and it exists by accident rather than design.

Why it happens

The Personal Allowance — the first £12,570 you earn tax-free — is withdrawn from anyone with income above £100,000. It reduces by £1 for every £2 above that threshold.

Follow the arithmetic. Earn £1,000 more than £100,000 and you lose £500 of Personal Allowance. That £500 was previously untaxed and is now taxed at 40%, costing £200. Meanwhile the £1,000 itself is taxed at 40%, costing £400.

Total tax on £1,000 of extra income: £600. An effective rate of 60%.

Add employee National Insurance at 2% and you're at 62%. For anyone with student loan repayments the figure climbs further.

The allowance runs out entirely at £125,140, and above that the marginal rate drops back to 45%. Which produces the genuinely odd situation of someone on £120,000 paying a higher marginal rate than someone on £500,000.

Who gets caught

More people than you'd expect, and often people who don't consider themselves wealthy. It's easy to cross £100,000 without a six-figure salary:

A bonus on top of a salary in the eighties or nineties

Rental income alongside employment

A one-off payment — redundancy above the tax-free element, a settlement, a share vesting

Two jobs, or a job plus self-employment

Selling a business or a large asset in a year you also earned normally

The measure is adjusted net income, which is your total taxable income from all sources with certain deductions. Not your salary.

The single most effective response

Pension contributions.

A gross pension contribution reduces your adjusted net income pound for pound. Contribute enough to bring adjusted net income to £100,000 and the entire Personal Allowance is restored.

The effect is striking. In the 60% band, a £1,000 gross pension contribution costs you £400 of take-home pay — because you'd have lost £600 to tax anyway. You've moved £1,000 into your pension for £400.

There is nowhere else in the tax system offering that. For anyone in this band who was going to contribute to a pension at some point anyway, doing it here is dramatically better value than doing it in any other year.

Salary sacrifice is usually the cleaner route where your employer offers it, because it reduces your income at source and saves National Insurance as well. See Salary sacrifice.

Two constraints. The Annual Allowance caps what can go in — £60,000 for most people, though carry forward can unlock more from previous years. And personal contributions are limited to 100% of your earnings.

Other levers

Gift Aid donations extend your basic rate band and reduce adjusted net income, so charitable giving is unusually efficient from this band — a donation costs you far less than its face value.

Timing. If income is lumpy and partly within your control — a bonus you can defer, self-employed invoicing near the year end, a gain you could realise in a different tax year — spreading across two tax years may keep you below the threshold in both.

Shifting income to a spouse. Assets held jointly or transferred to a lower-earning spouse produce income taxed at their rate rather than yours. Transfers between spouses are generally free of capital gains tax and inheritance tax, which makes this simpler than it sounds. It has to be a genuine transfer of ownership, not a paper arrangement.

Salary sacrifice for other benefits — electric cars, additional holiday, cycle schemes — also reduces adjusted net income, though these are worth doing on their own merits rather than purely for the tax.

The thing not to do

Turning down a pay rise or refusing extra work to stay below £100,000 makes no sense. Even at a 60% marginal rate you keep 40 pence of every pound. More income is still more income.

The point isn't to avoid crossing the threshold. It's to notice you've crossed it, and to use the unusually generous relief available while you're there.

What to do

Work out your adjusted net income including everything, not just salary. If it's above £100,000, calculate what pension contribution would bring it back to that level, and what that contribution actually costs you net. Most people who do this arithmetic for the first time are surprised.

If your income is variable and you might land in this band, it's worth knowing before the tax year ends rather than after — the options narrow considerably once 5 April has passed.

This article is for general education only and isn't personal advice. The interaction between adjusted net income, pension allowances and other reliefs can be complex, and is worth having checked where the sums are significant.