If your income is approaching or has already exceeded £100,000, you are entering a zone where the effective rate of Income Tax becomes significantly higher than most people realise. Between £100,000 and £125,140, the combination of paying higher rate tax and losing your personal allowance creates what is widely referred to as the 60% tax trap. Understanding how this works and, more importantly, how to mitigate it through legitimate planning is one of the most valuable conversations you can have with your accountant. This article provides general information about the strategies available. For advice tailored to your own circumstances, please speak to a qualified financial adviser or accountant.
What Is the 60% Tax Trap?
The 60% tax trap arises because of the way HMRC withdraws the personal allowance for higher earners. For the 2026 to 2027 tax year, the standard personal allowance is £12,570. This is the amount of income you can receive before paying any Income Tax. The personal allowance has been frozen at this level since 2021 and, following Budget 2025, will remain frozen until April 2031, meaning more people will be drawn into the taper band as wages rise over time.
For every £2 of adjusted net income above £100,000, you lose £1 of your personal allowance. By the time your income reaches £125,140, your personal allowance has been reduced to zero entirely.
This means that in the £100,000 to £125,140 band, you are effectively paying tax at 40% on your actual income AND losing tax relief on the withdrawn personal allowance simultaneously. The combined effect produces an effective marginal tax rate of 60% on each pound earned in that range.
A Worked Example of the 60% Effective Rate
To illustrate the impact, compare someone with adjusted net income of £100,000 against someone on £101,000:
- Adjusted net income: £100,000 in the first case, £101,000 in the second
- Personal allowance remaining: £12,570 falls to £12,070
- Taxable income: £87,430 rises to £88,930
- Additional tax on that extra £1,000: £600
- Effective marginal rate on that £1,000: 60%
Of that £600 additional tax, £400 comes from Income Tax at 40% on the extra £1,000 of income, and £200 comes from the tax on the £500 of personal allowance lost. In total, earning an extra £1,000 in this band costs £600 in tax.
How Do You Avoid the 60% Tax Trap?
The most effective strategies for reducing adjusted net income below £100,000, or at least minimising exposure to the 60% band, are all entirely legal and widely used by higher earners. The information below is intended as a general overview. Whether any particular strategy is right for you will depend on your individual circumstances, and we would always recommend discussing your options with your accountant before taking action.
Personal Pension Contributions
Making personal pension contributions is one of the most powerful tools available. Personal pension contributions reduce your adjusted net income for tax purposes. If your income is £110,000 and you make a gross pension contribution of £10,000, your adjusted net income falls to £100,000 and you avoid the personal allowance taper entirely.
In practice, a £10,000 gross contribution costs you £6,000 out of pocket after basic rate tax relief is added by the pension provider. Because it removes £10,000 of income from the 60% effective rate band, the true tax saving is even more significant. The net cost after all reliefs can be as low as £4,000 for a £10,000 gross contribution for someone fully within the taper band.
The annual allowance for pension contributions is £60,000 for the 2026 to 2027 tax year, subject to your earnings. Unused allowance from the previous three tax years can also be carried forward. Please note that pension contribution rules are complex and this is general information only. Personal advice from a regulated financial adviser is recommended before making significant pension decisions. Our guide to tax-efficient pension planning for company directors covers the company route in more detail.
Employer Pension Contributions and Salary Sacrifice
If you are employed, salary sacrifice is another highly effective route. Under a salary sacrifice arrangement, you agree to reduce your gross salary in exchange for your employer making additional pension contributions on your behalf. Because the contribution comes from your employer rather than yourself, your gross employment income is reduced, which in turn reduces your adjusted net income.
A key advantage of salary sacrifice over personal contributions is that it also saves National Insurance for both you and your employer, making it more tax efficient overall. Whether salary sacrifice is available to you depends on your employer's arrangements and your employment contract. This is general information and we would recommend taking advice specific to your situation before entering into any salary sacrifice arrangement.
For directors of limited companies, employer pension contributions paid by the company directly into a director's pension are deductible against Corporation Tax and do not attract National Insurance. This makes them one of the most efficient ways to extract money from a company while building long term wealth and managing personal income levels.
Charitable Giving Under Gift Aid
Donations to charity made through Gift Aid also reduce your adjusted net income. When you make a Gift Aid donation, HMRC treats the gross donation (your payment grossed up by the basic rate of tax) as reducing your adjusted net income. For someone in the personal allowance taper band, this can be highly effective.
For example, a £1,000 cash donation under Gift Aid becomes a £1,250 gross donation for tax purposes, reducing your adjusted net income by £1,250 and potentially restoring £625 of your personal allowance.
Timing of Bonuses and Income
Where you have some control over the timing of income, for example if you receive a bonus that could be deferred to a later year or if you are a director with flexibility over when you draw dividends, planning the timing carefully can make a significant difference. Keeping adjusted net income below the £100,000 threshold in any given tax year avoids the taper entirely.
This type of planning requires a proactive approach and ideally should be considered before the end of the tax year. At Affinity Associates Isaacs & Co, our tax planning service works with clients earning around and above £100,000 to review their position and discuss the options available for their individual circumstances. Get in touch if you would like us to look at yours.