What You Need to Know

If you’re earning around £100,000 or more in the UK, you might be falling into one of the least understood quirks in the income tax system: the 60% effective tax trap. While the top rate of income tax is officially 45%, many earners are unknowingly paying a much higher marginal rate on a portion of their income.

How It Works

In the UK, everyone is entitled to a Personal Allowance — the amount of income you can earn before paying income tax. For most people, this is set at £12,570. However, once your income exceeds £100,000, your Personal Allowance starts to reduce at a rate of £1 for every £2 earned over the £100,000 threshold.

This tapering means that by the time you earn £125,140, you have completely lost your tax-free Personal Allowance.

Why It’s a 60% Tax Rate

Let’s say you earn an extra £1,000 above the £100,000 threshold. You lose £500 of your Personal Allowance. That £500 is now taxed at 40%, costing you £200 in additional tax.

On top of that, the original £1,000 you earned is also taxed at 40%, costing you £400.

So in total, you pay £600 in tax on a £1,000 increase in income — an effective marginal tax rate of 60%.

Who Is Affected?

Anyone with income between £100,000 and £125,140 is subject to this tax trap. It’s particularly relevant for high earners receiving bonuses, pay rises, or additional income from investments or rental property.

Can You Avoid It?

There are a few strategies to reduce or eliminate the impact of the 60% trap:

• Pension Contributions: Making contributions to your pension reduces your taxable income, which could restore your Personal Allowance.

• Gift Aid Donations: Charitable donations may also reduce your adjusted net income.

• Salary Sacrifice Schemes: These can be used to lower your taxable income in exchange for benefits like pensions or childcare vouchers.

Final Thoughts

The 60% tax trap is a hidden penalty that catches many earners off guard. Understanding where the thresholds lie — and taking action — can help you avoid unnecessarily high tax bills. Always consider speaking to a qualified tax adviser for tailored guidance.