What Is the 60% Tax Trap & How Can You Avoid It?

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Did you know some UK taxpayers effectively pay a 60% income tax rate on part of their salary?

This is a hidden burden that results from the tapering of the personal allowance, a process that impacts high earners once their income exceeds certain thresholds. The effective rate can be steep, affecting your overall net income and increasing your tax charge. But the good news is that there are ways to avoid this.

In this article, we’ll break down how the 60% tax trap works and explore the best ways to reduce the impact on your finances.

Key takeaways

The 60% tax trap affects those earning between £100,000 and £125,140, where the standard personal allowance is gradually withdrawn. This means every £100 you earn is reduced to £40.
There are a few ways to avoid the 60% tax trap, but you must be proactive.
Boosting pension savings is one of the most effective ways to reduce your tax burden and restore your full personal allowance.
Other options, like charitable donations, salary sacrifice, or changing how and when income is received, can reduce your overall income tax bill.

What is the 60% tax trap?

The 60% tax trap occurs when your income exceeds £100,000. For every £2 of income you earn above this threshold, you lose £1 of your personal allowance (currently £12,570). This tapering continues until your income reaches £125,140, at which point the entire personal allowance is withdrawn. As a result, you pay a higher percentage of tax on your income, leading to an effective tax rate of 60% on that portion of your earnings.

Example: If you earn £110,000:

You’re £10,000 above the £100,000 threshold.
You pay 40% tax on that £10,000, which amounts to £4,000.
However, you also lose £5,000 of your personal allowance, which now becomes taxable at 40%. This results in an additional £2,000 in tax.

This means you’ve paid £6,000 in tax on that £10,000 of income, which equals a 60% effective tax rate.

This situation is often referred to as a stealth tax. It catches many taxpayers by surprise, gradually eroding their tax-free income without them realising the full impact. As a result, it’s affecting an increasing number of taxpayers as their income rises above the £100,000 mark.

Other considerations after earning £100,000

If you earn over £100,000 and have children, there are other potential financial pitfalls to be aware of. For example, once your income exceeds this threshold, you lose access to certain childcare benefits, including tax-free childcare and the 15 or 30 hours of free childcare per week. This can significantly increase the cost of childcare. It’s therefore important to factor this in when assessing the full impact of your income.

Can I legally avoid the 60% tax trap?

Yes, there are several legal and HMRC-approved ways to reduce your adjusted net income, which is used to calculate how much of your personal allowance you lose. This figure includes your total taxable income, such as salary, rental income, and interest, minus certain deductions like pension contributions, charitable donations under Gift Aid, and payments into trade unions or professional bodies.

By making pension contributions, donating to good causes through Gift Aid, or using salary sacrifice schemes, you can bring your income below the tapered personal allowance threshold. This helps lower your marginal tax rate and avoid the 60% trap.

Let’s look at some of the most effective ways to do this.

Why is boosting pension contributions worth considering?

Pension contributions are one of the most effective ways to reduce your taxable income. By contributing to a workplace pension, basic rate tax relief (20%) is typically applied automatically through payroll. If you contribute to a Self-Invested Personal Pension (SIPP), most providers claim the basic rate tax relief on your behalf and add it to your pension pot, though this may not be instant.

If you’re a higher-rate or additional-rate taxpayer, you can then claim back an extra 20% or 25% via your self-assessment tax return, depending on your income level. This extra relief won’t show up in your pension account but will reduce your income tax bill or increase your tax refund.

If you’re facing the 60% tax trap, making additional pension contributions could bring your adjusted net income below the threshold, restoring some or all of your personal allowance and reducing your effective tax rate.

Just be mindful of the annual allowance, which limits how much you can contribute to pensions each tax year while still benefiting from tax relief. You can usually contribute up to 100% of your annual earnings, capped at £60,000. However, if you earn over £260,000, your allowance may be tapered down to as little as £10,000.

In addition to reducing your tax bill, pension contributions offer long-term benefits:

Tax relief boosts the fund value of your pension
You benefit from compound growth over time
It supports a more comfortable retirement, with flexibility on when and how you access your money

How you can invest in your pension: Workplace vs SIPP

If you’re employed, your workplace pension is often the best starting point, especially when your employer offers contributions. Increasing your own contributions through a salary sacrifice arrangement is one of the simplest ways to lower your annual income and avoid the 60% tax trap.

For those who want more control or investment flexibility, a Self-Invested Personal Pension (SIPP) can be a great alternative. It’s also a solid option if you’re self-employed. Unlike workplace pensions, SIPPs don’t automatically apply tax relief, but you can claim it later through your self-assessment tax return.

SIPPs allow you to:

Choose from a wide range of investments
Control how and where your pension is invested
Top up your savings easily when you receive bonuses or irregular income

InvestEngine, for example, offers a fee-free SIPP that’s ideal for those looking for low-cost, hands-on pension management. Whether you’re just getting started or are a more experienced investor, it’s a tax-efficient way to grow your retirement savings while reducing your current income tax bill.

Other ways to reduce your tax bill

While paying taxes is inevitable, there are several strategies, beyond pension contributions, that can help you manage your tax liability more efficiently and avoid falling into the 60% tax trap. Here are some key ways to improve your tax efficiency:

Consider non-cash employee benefits like a company car or private health insurance through a salary sacrifice scheme. This can lower your taxable income while increasing your overall compensation.
Make charitable donations through Gift Aid, which allows higher-rate taxpayers to claim additional tax relief.
Explore tax-efficient investments, such as ISAs. While these won’t reduce your income tax bill, they protect your savings and investment gains from future tax liabilities.

Final thoughts: How to avoid the 60% tax trap

The 60% tax trap can quietly erode your net income if you’re not careful. However, with smart planning—especially through pension contributions, salary sacrifice arrangements, and other legal ways—you can retain more of your income and strengthen your financial future.

Understanding how the UK tax system works and aligning your finances with current tax rules is key.