Most working adults will pay Income Tax on their salary, with higher earners paying increased rates. It’s important to pay attention to your tax liability, so you can plan effectively and potentially find ways to retain more of your wealth.
This could be challenging if you earn £100,000 or more because you might fall into the “60% tax trap”.
Due to a specific rule about tax allowances, you could effectively pay 60% Income Tax on your earnings between £100,000 and £125,140.
Read on to learn why this is and how you could potentially get around it.
You will pay Income Tax on any earnings that exceed your Personal Allowance
As you probably know, the amount of Income Tax you pay depends on your earnings and which tax bracket they fall into.
Normally, you won’t pay Income Tax on earnings up to your “Personal Allowance”. This is £12,570 in 2025/26.
If you earn more than this, in 2025/26 you will typically pay the:
- Basic rate of 20% on earnings between £12,571 and £50,270
- Higher rate of 40% on earnings between £50,271 and £125,140
- Additional rate on earnings that exceed £125,141.
However, an additional rule that applies to those earning more than £100,000 means that you could pay an extra 20% Income Tax on earnings between £100,000 and £125,140.
You start losing your Personal Allowance if you earn more than £100,000
The “60% tax trap” is caused by the tapering of the Personal Allowance for those earning more than £100,000. You’ll lose £1 of your Personal Allowance for every £2 your income exceeds £100,000.
Consequently, you won’t benefit from any Personal Allowance at all once your earnings reach £125,140. This rule means that you’ll effectively pay 60% on your earnings between £100,000 and £125,140.
Here’s how this works.
Imagine you earned £100,000 and received a £1,000 pay increase. You would pay 40% Income Tax (£400) on that additional £1,000.
However, as you’re now earning more than £100,000, your Personal Allowance would fall by £500. This £500 would also be taxed at 40%, meaning you pay another £200.
So, you pay a total of £600 Income Tax on the extra £1,000 earnings – a rate of 60%.
Increasing your pension contributions could help you get around the 60% tax trap
Progressing in your career and increasing your earnings could mean that you enjoy a better quality of life and have more disposable income to save for the future. Yet, the 60% tax trap could dampen these benefits to some extent.
Fortunately, there are ways to potentially get around this quirk of the tax system, such as increasing your pension contributions.
This is because your Income Tax and National Insurance contributions (NICs) are calculated based on your income after pension contributions are deducted.
So, using the example above, if your earnings increased to £101,000, you might decide to contribute the additional £1,000 to your pension. This would reduce your taxable earnings to £100,000, meaning you wouldn’t be caught out by the 60% tax trap.
On top of this, you typically benefit from 20% tax relief on your pension contributions. Higher- or additional-rate taxpayers can also claim another 20% or 25% through self-assessment.
Your employer may match your increased contributions too.
As such, saving more in your pension could help you reduce the Income Tax you pay while also giving you a valuable boost to your retirement pot.
Bear in mind that the tax relief you can benefit from is limited by your Annual Allowance. This is the total amount you can contribute to your pension each year without triggering an additional tax charge. In 2025/26, the Annual Allowance is £60,000 (or 100% of your earnings, whichever is lower).
That’s why it’s important to seek professional advice and ensure that you’re being as tax-efficient as possible. If you have already used your Annual Allowance for the year, we can help you explore alternative ways to mitigate the effects of the 60% tax trap.
It’s also important to note that increasing your pension contributions may reduce your take-home pay. This would mean you have less monthly income to cover your regular expenses or contribute to savings and investments outside your pension.
You may want to consider whether this reduction in take-home pay would disrupt your financial plan.
Salary sacrifice could be an effective way to reduce your taxable income
Some businesses offer salary sacrifice schemes to their employees. If you take advantage of salary sacrifice, you essentially give up (or sacrifice) a portion of your earnings in exchange for another benefit, including a company car, private healthcare, or pension contributions.
When you pay your pension contributions through salary sacrifice, your employer will reduce your earnings by the amount you normally contribute and then pay this amount directly into your pension instead.
This could mean that you’re able to maintain the same level of pension contributions, while also reducing your taxable income and retaining more of your Personal Allowance.
Get in touch
If you’re concerned about the 60% tax trap, we can help.
Please get in touch or email us at advice@mlifa.co.uk for more information.
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.
The Financial Conduct Authority does not regulate tax planning.
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 value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.