Avoiding the 60% Tax Trap: Earnings above £100,000

2024/2025 Tax Year

If you’re earning between £100,000 and £125,140, you might find yourself caught in the so-called “60% tax trap.” This isn’t an official tax rate, but it can feel like one due to the way the UK’s tax system works. Here’s how it happens and what you can do about it.

What is the 60% Tax Trap?

The 60% tax trap occurs because for every £2 you earn over£100,000, you lose £1 of your personal allowance. This means for income between £100,000 and £125,140 you're effectively taxed at 60% on that portion of your earnings.

You are already taxed 40% on the income but because you lose the personal allowance of £12,570, this means you incur an extra 20% tax.

How to Avoid the 60% Tax Trap

One of the most effective ways to avoid the tax trap is by increasing your pension contributions to bring the net income to £100,000 or lower.

Example:

If you earn £110,000 then you lose £5,000 of the personal allowance, but by making a net contribution of £8,000 (gross £10,000) this reduces your taxable earnings to £100,000 and restores the full personal allowance, effectively saving you 60% tax.

• The pension contribution of £8,000 net is grossed up to £10,000 saving you £2,000 (20%) in tax.
• A further £2,000 can be reclaimed through your self-assessment to give you the full 40% tax relief.
• £5,000 of the personal allowance is restored, which means you save a further 20% / £2,000 by not being taxed on this amount.
• That's a total saving of £6,000 on a gross £10,000 pension contribution.

Extra Considerations

• With higher interest rates on offer this can compound the issue for higher earnings and push them into the tax trap. Care needs to be taken on who's name the savings are held in or whether a bigger pension contribution is needed.
• It's important to note  the extra tax relief needs to be reclaimed by a self-assessment tax return.
• Those who own their own company can easily manipulate earnings to keep below this £100,000, with company pension contributions being an alternative to reduce corporation tax and extract funds from the business in a tax efficient way.
• This is only applicable to those under age 75.

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Risk Warnings

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

Past performance is not a reliable indicator of future performance and should not be relied upon.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen. The Financial Conduct Authority does not regulate tax planning.