Earning over £100,000? Beware the 60% tax trap
Many people are surprised to discover that a slice of their income may be taxed at an effective rate of up to 60% (67.5% in Scotland). This so‑called “tax trap” affects individuals earning over £100,000 - and it often goes unnoticed until payslips or tax returns are reviewed in detail.
As frozen tax thresholds and rising salaries pull more professionals into this bracket, understanding how the trap works - and how to mitigate it - has become increasingly important.
How the 60% tax trap arises
Although there is no official 60% income tax band in England, Wales and Northern Ireland, this effective marginal rate is created by the way the personal allowance is withdrawn once income exceeds £100,000.
- For every £2 of income above £100,000, £1 of personal allowance is lost
- By the time income reaches £125,140, the personal allowance is removed entirely
This results in a steep marginal tax rate between £100,000 and £125,140, where additional income is taxed at 40% and the loss of allowance effectively adds a further 20%.
In practical terms, an incremental pay rise, bonus or overtime payment can leave you significantly worse off than expected.
Why this matters in practice
Because of these rules, extra work or one‑off income can feel disproportionately penalised. In some cases – particularly for parents claiming tax-free childcare – going over the £100,000 threshold could leave them financially worse off. The impact has intensified in recent years due to fiscal drag - with tax thresholds frozen while wages have increased. Groups such as senior managers, consultants, medical professionals and other experienced specialists are increasingly affected, even if they would not traditionally view themselves as high earners.
What about Scotland?
The withdrawal of the personal allowance after £100,000 applies UK‑wide. However, as Scotland has its own income tax bands and rates, the marginal rate for income between £100,000 and £125,140 is 67.5%.
Additional Scottish income tax bands between the basic and higher rates can further complicate matters.
The role of pensions in managing the tax trap
For those caught in the £100,000–£125,140 range, pension planning can be one of the most effective ways to reduce the impact of the tax trap.
Key pension‑related considerations include:
- Increasing personal pension contributions
Pension contributions reduce "adjusted net income”, which can help bring earnings back below £100,000 and reinstate the personal allowance, while simultaneously obtaining tax relief at the individual’s top rate and boosting long‑term retirement savings. - Using employer pension schemes or salary sacrifice
Salary sacrifice arrangements can be particularly efficient as they reduce income subject to income tax and national insurance in one step. - Balancing pension funding with future access and estate planning
While pensions remain highly tax efficient, decisions should be made in the context of wider financial goals, investment risk, cashflow needs and longer‑term succession planning.
Used correctly, pensions can turn a highly penal tax position into a more balanced and intentional planning outcome.
Other planning tools to consider
Alongside pensions, there are additional ways to manage exposure to the tax trap:
- Gift Aid donations also reduce “adjusted net income” and can help reinstate the personal allowance. Gift Aid donations may also result in more income being taxed at lower rates
- Reviewing the split of income-generating assets between spouses/ civil partners
- Careful timing of bonuses or variable income, where flexibility exists
- Reviewing benefits and allowances available through your employer; which may also use salary sacrifice.
No single strategy suits everyone, and the right mix will depend on income profile, personal circumstances and long‑term objectives.
We’re here to help
The interaction between income tax, personal allowances and pension planning can be complex - and small missteps can be costly.
With the right advice, it’s often possible to reduce the impact of the tax trap while ensuring your earnings are working harder for both the present and the future. Our tax specialists and financial planners at Azets Wealth Management can help you review pension contributions and wider planning options in the context of your overall position.
If you’re concerned you may be affected - or want to explore whether your income could be structured more efficiently - now is a good time to start the conversation.