How to avoid the 60% Income Tax trap this year

Navigating the UK’s tax system can be complicated at times, especially for higher earners. Indeed, while you may be familiar with the thresholds for the tax bands, you might not be aware of a trap that can result in an effective tax rate of 60%.

This is often referred to as the “60% Income Tax trap”, and the Financial Times reveals that the number of people caught out by the trap has risen by 45% in the space of two years.

If you do fall victim to the trap, you may end up facing a more substantial tax bill than you originally anticipated. This makes it vital to understand how it works, so continue reading to discover what exactly causes the 60% Income Tax trap, and some ways to potentially mitigate its effects.

 

A tapering of the Personal Allowance causes the 60% Income Tax trap

The 60% Income Tax trap occurs due to the gradual tapering of the Personal Allowance. As of 2024/25, the Personal Allowance – the amount of income you can earn before incurring tax – is set at £12,570.

Then, any further income is taxed at the following rates:

• The basic rate – 20% on income between £12,571 and £50,270
• The higher rate – 40% on income between £50,271 and £125,140
• The additional rate – 45% on income above £125,140.

This might seem straightforward enough. However, an important caveat is that for every £2 you earn above £100,000, you lose £1 of your Personal Allowance.

This means that by the time your adjusted net income reaches £125,140 – the additional-rate threshold – you essentially lose your entire Personal Allowance.

This tapering creates an effective marginal tax rate of 60% on income between £100,000 and £125,140.

So, to give an example, imagine your income is £115,000. In this instance, you earn £15,000 above the £100,000 threshold, meaning you lose £7,500 of your Personal Allowance. This would be taxed at 40%, adding £3,000 to your tax bill.

Combined with the standard 40% tax on the £15,000 above the threshold – equating to £6,000 – your total tax liability on this portion of your income is £9,000.

As such, you’re left with just £6,000 from the original £15,000, creating an effective tax rate of 60%.

 

There are several strategies that could help you avoid the tax trap

If you’re concerned about the financial implications of the 60% trap, there are several steps you could take to reduce your taxable income and your tax liability as a result – read on to find out how.

Boost your pension contributions

One of the more practical ways to lower your adjusted net income – all while securing your financial future – is by increasing contributions to your pension.

All types of personal or employee pension contributions reduce your adjusted net income, subsequently reducing the amount of income that could be subject to the 60% effective rate.

So, imagine you receive a £1,000 pay rise, taking your total income from £100,000 to £101,000. If you took this as a salary, you’d pay 40% – or £400 – in Income Tax, and your Personal Allowance would be reduced by £500.

This means that you’d pay an additional 40% tax on these earnings, or £200, taking your total tax bill on that £1,000 increase to £600 (60%).

Though, if you paid that £1,000 into your pension instead, you wouldn’t enter the 60% bracket. What’s more, you’d benefit from an effective rate of tax relief of 60% on your contribution thanks to 40% tax relief and avoiding any loss of Personal Allowance, and that £1,000 may be boosted further by employer contributions.

Just note that if you’re a higher- or additional-rate taxpayer, you must claim tax relief above the basic rate through your self-assessment tax return. Alternatively, you can obtain higher-rate relief through a tax code adjustment, or by contacting HMRC directly.

Try salary sacrifice

Salary sacrifice schemes could offer an effective way to manage your taxable income. Through this arrangement, you essentially agree to exchange part of your salary for eligible non-cash benefits from your employer, such as childcare, cycle-to-work schemes, or additional pension contributions.

Reducing your overall salary lowers your adjusted net income, potentially avoiding losing your Personal Allowance.

For example, if your salary is £110,000, you could sacrifice £10,000 of your income and instead contribute it to your pension.

This would bring your income back down to £100,000, preserving your Personal Allowance and reducing your overall tax liability.

Consider charitable donations

Another helpful way to reduce your adjusted net income is by making charitable Gift Aid donations.

Charitable donations made via Gift Aid are deducted from your adjusted net income. Crucially, these are grossed up by the basic rate of Income Tax. So, you’ll reduce your income by £1.25 for every £1 you donate, which could help you manage how much of your Personal Allowance you lose.

You can also then personally claim the higher rate of tax relief from your donation, making it even more tax-efficient.

 

Professional guidance is essential in managing your tax liability

If you are a higher earner, dealing with tax can be complex, especially due to the 60% tax trap.

Thankfully, an adviser could help you understand your tax position, identify strategies to reduce your overall liability, and create a comprehensive plan that aligns with your long-term goals.

If you’d like to find out more about just how helpful bespoke advice can be, email info@chancellorfinancial.co.uk or call 01204 526 846 to speak to an adviser.

If you’re already a client here at Chancellor, contact your personal financial adviser to discuss any of the content you’ve read in this article.

 

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts. 

The Financial Conduct Authority does not regulate tax planning.