The 60% tax trap is an effective marginal tax rate of 60% that applies to UK taxpayers whose adjusted net income falls between £100,000 and £125,140. It arises because the personal allowance (£12,570 in 2026/27) is tapered away at £1 for every £2 of income above £100,000 — creating a hidden extra tax burden on top of the 40% higher-rate income tax already due in that band. The most effective legal way to avoid it is to reduce adjusted net income below £100,000, most commonly through employer pension contributions, personal pension contributions, Gift Aid donations, or salary sacrifice.
- Why the personal allowance taper creates a 60% rate
- The exact income band and numbers
- Who is affected?
- Strategy 1 — Employer pension contributions
- Strategy 2 — Personal pensions and Gift Aid
- Strategy 3 — Salary sacrifice
- Strategy 4 — Timing income carefully
- Strategy 5 — Trading losses and capital allowances
- Frequently asked questions
Many UK taxpayers earning above £100,000 are unaware they face an effective marginal tax rate of 60% — not through a single tax rate of that level, but through the interaction of two separate rules in the tax code. Understanding this trap and how to avoid it legally is one of the most valuable things a high earner can do before the end of each tax year.
01 Why the personal allowance taper creates a 60% rate
Every UK resident receives a personal allowance — an amount of income sheltered from income tax each year. For 2026/27 this is £12,570, frozen at that level until April 2028 under current government policy.
Under Income Tax Act 2007, s.35, this allowance is progressively withdrawn once adjusted net income exceeds £100,000. The withdrawal rate is £1 of allowance for every £2 of income above that threshold. Since the withdrawn allowance would have sheltered income from 40% higher-rate tax, its removal effectively adds an additional 20% to the 40% already due in that band, producing a combined effective rate of 60%.
How 60% arises on every £2 earned above £100,000
02 The exact income band and numbers
The personal allowance is fully eliminated when adjusted net income reaches £125,140 (because £100,000 + 2 × £12,570 = £125,140). Between £100,000 and £125,140, every pound of income costs 60p in tax. Above £125,140 the effective rate falls back to the 45% additional rate, because the personal allowance is already gone and no further taper applies.
| Income band (2026/27) | Effective marginal rate | Reason |
|---|---|---|
| Up to £12,570 | 0% | Within personal allowance |
| £12,571 – £50,270 | 20% | Basic rate |
| £50,271 – £100,000 | 40% | Higher rate |
| £100,001 – £125,140 | 60% | 40% tax + 20% hidden cost of personal allowance taper |
| Above £125,140 | 45% | Additional rate (personal allowance fully gone) |
03 Who is affected?
The trap applies to anyone whose adjusted net income falls between £100,000 and £125,140. Adjusted net income is total income from all sources minus certain deductions (personal pension contributions, Gift Aid donations and specific reliefs defined in ITA 2007, s.58). It is not the same as gross salary or the figure on a P60.
People most commonly caught include:
- Employees receiving a year-end bonus that pushes them above £100,000 — even one year
- Company directors drawing salary plus dividends — dividend income counts in full toward adjusted net income
- Professionals in law, medicine, finance and accountancy whose profit shares regularly land in this band
- Freelancers and contractors with a strong year
- Landlords whose rental income, combined with other sources, crosses £100,000
Self Assessment obligation: If income exceeds £100,000, you must register for Self Assessment even if all income is PAYE. HMRC will typically issue a revised 0T tax code to recover the allowance via PAYE, but this rarely captures the full position accurately, especially with multiple income sources. Filing a return is both legally required and the only way to ensure the correct amount of tax is paid — no more, no less.
04 Strategy 1 — Employer pension contributions
For company directors, employer pension contributions from the company directly into a pension scheme are the most tax-efficient solution available. These contributions:
- Reduce the company's taxable profit (deductible against corporation tax, subject to the wholly-and-exclusively test)
- Are not income in the director's hands, so never enter adjusted net income at all
- Attract no employer or employee National Insurance contributions
- Do not affect the personal allowance taper because they bypass personal income entirely
Example: director with £110,000 adjusted net income
The pension Annual Allowance is £60,000 per tax year (or 100% of relevant UK earnings if lower). Unused allowance from the previous three tax years can be carried forward. Note that from April 2027, undrawn defined contribution pension pots will fall within the scope of Inheritance Tax under Finance Act 2026 — pension planning decisions should factor this into overall estate planning.
05 Strategy 2 — Personal pensions and Gift Aid
PAYE employees who cannot make employer contributions in the same way can achieve equivalent relief through personal pension contributions via a SIPP or workplace scheme operating relief at source. HMRC grosses up the net contribution by basic-rate relief (you pay in £8,000, the scheme receives £10,000), and the gross pension contribution reduces adjusted net income for the personal allowance taper.
Gift Aid donations (under ITA 2007, s.414) operate in the same way. The gross value of a Gift Aid donation — your net donation plus the basic-rate relief the charity reclaims — is deducted from adjusted net income. Donating £8,000 under Gift Aid creates a gross deduction of £10,000, reducing adjusted net income by that amount with no cap beyond the limit that donations cannot exceed income for the year.
Combining strategies: Pension contributions and Gift Aid can be combined. A taxpayer with adjusted net income of £115,000 could, for example, make a £10,000 personal pension contribution (gross £10,000) and donate £4,000 under Gift Aid (gross deduction £5,000) to reduce adjusted net income to £100,000, restoring the full personal allowance and saving approximately £9,000 in income tax — more than the total spent on donations.
06 Strategy 3 — Salary sacrifice
Salary sacrifice (governed by ITEPA 2003, ss.69A–69E as “optional remuneration arrangements”) involves contractually giving up part of salary in exchange for employer pension contributions or other qualifying benefits. The contractual reduction in salary directly reduces adjusted net income and therefore the personal allowance taper.
Key requirements: the sacrifice must be a genuine, irrevocable contractual change before the income arises (retrospective salary sacrifice is not permitted under HMRC practice); the arrangement must be documented; and the benefit received must be an exempt or qualifying one (pension contributions remain the cleanest example).
07 Strategy 4 — Timing income carefully
Self-employed individuals, partners and company directors have some legitimate flexibility to manage the timing of income between tax years. If income in one year is likely to fall between £100,000 and £125,140, bringing it below £100,000 by deferring an invoice, accelerating deductible expenses, or managing dividend declarations can eliminate the 60% effective rate entirely for that year.
Conversely, if income will comfortably exceed £125,140 regardless, there is no benefit to partial reduction — the goal of any timing strategy should be to reach either below £100,000 (trap completely avoided) or above £125,140 (into the 45% band where each additional pound keeps more value). Stopping at £118,000 instead of £125,000 achieves nothing except postponing income.
08 Strategy 5 — Trading losses and capital allowances
For those running a business, trading losses under ITA 2007, ss.64–70 can be set against total income of the same or preceding year, potentially reducing adjusted net income below £100,000. Annual Investment Allowance (currently £1 million per year) provides immediate 100% tax deduction for capital expenditure on qualifying plant and machinery, accelerating deductions into the current year and reducing trading profit.
These strategies should only be pursued where the expenditure has genuine commercial purpose. Manufactured or artificial losses carry investigation risk and potentially penalties under Finance Act 2007, Schedule 24, and the General Anti-Abuse Rule (GAAR) in Finance Act 2013, Part 5.
09 Frequently asked questions
Yes. A bonus received in a tax year that pushes adjusted net income above £100,000 activates the personal allowance taper for that entire year. Making a pension contribution in the same tax year to bring adjusted net income back below £100,000 is the most common response and produces 60p of tax relief per £1 contributed in that band.
Yes. Adjusted net income includes all income sources: employment income, self-employment profit, rental income, savings interest and dividend income. A director drawing £80,000 salary and £30,000 in dividends has adjusted net income of £110,000, firmly inside the trap, even though dividends are taxed at lower rates. Dividend income counts in full for the personal allowance taper regardless of the dividend tax rate that applies to it.
Defined in ITA 2007, s.58 as total net income minus: (a) the gross amount of personal pension contributions (the amount contributed plus the basic-rate tax relief added by the scheme); (b) the gross amount of Gift Aid donations; (c) trading losses relieved under ITA 2007, ss.64–70; and (d) certain other specified reliefs. It is not the same as taxable income on a P60 or a payslip.
A £30,000+ pension contribution to reach below £100,000 provides effective tax relief of 60p on the £25,140 in the trap zone plus 40p on the remainder, so the relief rate varies. At £130,000 the first £25,140 of reduction (from £125,140 to £100,000) produces 60% relief — very attractive. The remaining £4,860 of contribution from £130,000 down to £125,140 only produces 45% relief. Whether the total makes sense depends on cash flow and wider financial planning; the answer is almost always yes, but the specific numbers should be modelled.
Once income exceeds £125,140, the effective rate falls to 45% and you are keeping 55p per additional pound earned. Below £100,000, you keep 60p per pound (40% higher-rate band). Inside the trap (£100,001–£125,140), you keep only 40p per pound. There is a genuine argument that earning slightly more than £100,000 is the worst financial position to be in, absent any planning — which is why timing, pension contributions and Gift Aid matter so much in this income range.
Are you caught in the 60% trap?
DKAT Accountants identifies whether you are affected, calculates the optimal pension contribution or strategy combination, and implements the plan before the tax year ends. We work with employees, company directors, landlords and self-employed professionals across London and the UK — all on a fixed fee.
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