Have you fallen victim to the 60% ‘tax trap’?

The 60% tax trap is becoming an issue for a growing number of higher earners. It affects people whose income moves above £100,000 (which is why it’s also known as the £100k tax trap), often because of a pay rise, bonus, investment income, rental income or a combination of these. At this level, the personal allowance starts to taper away, which can create an effective tax rate of up to 60%.

With a Labour government in power since July 2024, it's clear now that the UK's financial landscape is constantly under review, with a particular focus on the taxation of high earners. While the freeze on income tax thresholds and allowances, was a policy previously set out by the Conservative government, Labour confirmed it would remain in place until at least April 2031, as they face ongoing pressure to address the impact of this fiscal drag. Each year sees more and more Britons pulled into higher tax bands and sadly, this is set to continue for many years to come.

For many professionals earning over £100,000, the assumption is that the top rate of tax is 45%. However, a feature of the UK tax system means some individuals are subject to an effective income tax rate of up to 60% on a portion of their income, plus a further 2% once National Insurance is included.

What’s more, a change announced in the Autumn Budget 2025 is set to reduce the effectiveness of one of the main strategies used to mitigate it: salary sacrifice. But more on that later.

Arrange your free initial consultation

What is the 60% tax trap?

The 60% tax trap refers to the income band falling between £100,000 and £125,140 on which the employed or self-employed will effectively experience an income tax rate of 60%. Once national insurance contributions of 2% are included, the effective rate can reach 62%.

This is because for every £2 you earn over £100,000 per annum, you lose £1 worth of your £12,570 tax-free personal allowance.

Your tax rate only reverts to the additional rate of 45% after the entirety of your personal allowance for that year has been eroded, i.e. on income above £125,140.

Let’s bring this to life with an example of how the tax trap works. If we assume an individual has earnings of £100,000 for the year, and they receive a bonus of £20,000.

This is why the 100k tax trap can feel counterintuitive. A pay rise, bonus or additional source of income may leave you with far less than expected once the loss of the personal allowance has been taken into account.

From this bonus, £8,000 is immediately lost to standard 40% higher rate tax. The double jeopardy here is the reduction in the personal allowance, which is reduced from the full entitlement of £12,570 to £2,570. This reduction of £10,000 means there is an additional £10,000 of income that sits within the higher rate tax bracket and is subject to 40% income tax. This is equivalent to a further £4,000 of income tax payable.

And then finally, there is the national insurance contribution payable on the bonus, which is at 2% above the higher rate tax threshold of £50,270, equating to £400 in this example.

The result is an effective tax rate of 62% with the individual taking home £7,600 of their £20,000 bonus.

According to new HMRC forecasts, more than 2 million people will fall into this £100,000 tax trap in the 2026/27 tax year, which is the highest number on record. In fact, the number of people earning more than £100,000 has nearly doubled in the last five years. 

This is no longer a niche issue affecting only the highest earners. Threshold freezes, wage growth, bonuses and investment income mean more professionals, business owners and senior employees are being pulled into the 100k tax trap without necessarily feeling significantly wealthier.

How can I mitigate the 60% tax trap?

Now you might be thinking, how can I avoid falling into the 60% tax trap? One of the main levers you can pull to help reduce your tax liability, and help you to avoid this trap, is increasing your pension contributions, as this reduces your ‘adjusted net income’.

Adjusted net income matters because it is the figure HMRC uses to assess whether your personal allowance should be reduced. It can also affect wider entitlements and allowances, which means the consequences of crossing £100,000 can go beyond income tax alone.

Pension Contributions 

By making pension contributions you can reduce your effective income and keep your ‘adjusted net income’ below £100,000, allowing you to preserve your personal allowance of £12,570.

There are two main ways to contribute to your pension as an employee: salary sacrifice and personal contributions. While both can reduce your taxable income, they work in different ways.

Salary sacrifice is an arrangement where you agree to give up part of your salary or bonus, which your employer then contributes directly into your pension on your behalf. This means the amount is taken from your gross pay before tax and national insurance are deducted, offering maximum tax efficiency. You can benefit from income tax relief of up to 60% plus an NI saving of 2% when using this method in the tax trap income band.

Alternatively, you can make personal contributions from your net income. These still attract tax relief, 20% is added to your pension automatically by HMRC, and you can claim back a further 20% if you are a higher rate taxpayer or 25% as an additional rate taxpayer.

What the proposed change to the salary sacrifice rules does mean that for contributions above the £2,000 per year threshold, there is limited difference (from a tax relief standpoint) between those made via salary sacrifice and those made personally. With that being said, one benefit of pension contributions via salary sacrifice is the tax relief is received immediately given contributions are taken off from gross income, therefore reducing your tax liability payable through PAYE. On the other hand, personal contributions may require tax relief to be reclaimed if you are a higher or additional rate taxpayer.  

Depending on your income for the tax year and the level of any employer contributions being made, you may be able to pay up to £60,000 into your pension and still receive tax relief on your contributions. You can sometimes make additional contributions into your pension if you have unused annual allowance from previous tax years.

Labour’s current stance means these pension strategies remain as relevant as ever for higher earners, with no announced changes to pension tax reliefs despite wider increases in the tax burden elsewhere.

It is also important to remember that, despite changes on the horizon, pensions continue to offer one of the most generous forms of tax relief available. Contributing to your pension not only reduces your tax bill but also builds long-term financial security. 

But changes to salary sacrifice from 2029 were announced in the Autumn Budget 2025. In this Budget, the government confirmed that from April 2029, a cap will be introduced on the National Insurance savings available through salary sacrifice pension contributions.

Under the new rules, only the first £2,000 of salary sacrificed into a pension each year will be exempt from employee and employer National Insurance. Contributions above this limit will still reduce your income tax liability, but they won’t generate NI savings as they do today.

This change doesn’t affect pension income tax relief itself, which remains in place. However, it will reduce the overall efficiency of using salary sacrifice to bring your income below the £100,000 threshold, particularly for those contributing significant amounts.

For contributions above the proposed £2,000 limit, the impact on employees above the higher rate tax threshold is broadly a 2% reduction in the overall tax efficiency of pension contributions. The impact is more stark for employers, who see a ‘hit’ of 15% on the cost of employee pension contributions above the £2,000 threshold. This puts an increasing strain on the total ‘cost’ of employees, following the increase in the employer NI contribution rate from 13.8% to 15% in April 2025. 

Charitable donations 

There are other options to reduce your income to avoid falling into the 100k tax trap. Charitable donations, similar to pension contributions, decrease your ‘adjusted net income’ and can allow you to reclaim some or all of your personal allowance.

Gift Aid can be particularly useful for higher earners who already give to charity. When a donation is made under Gift Aid, the charity can claim basic rate tax relief and you may be able to claim additional relief through self assessment. The gross value of the donation can also reduce your adjusted net income, which may help preserve your personal allowance if your income is close to or above £100,000.

Childcare and family benefits

For families, the 100k tax trap can have a further sting. Once adjusted net income exceeds £100,000, eligibility for certain childcare support can be lost. This can include Tax Free Childcare and funded childcare hours, depending on your circumstances and where you live in the UK.

This means that a parent moving just above £100,000 may face the loss of personal allowance as well as the loss of childcare support. For some families, this can make the effective cost of earning more significantly higher than the headline tax rate suggests. Pension contributions and Gift Aid donations can sometimes help bring adjusted net income back below the threshold, but the rules are detailed and planning should be done carefully.

Other income lowering tactics to consider

Pensions and charitable giving are often the most common planning tools, but they are not the only areas to review. If you have control over the timing of bonuses, dividends or business income, it may be worth considering whether income can be spread across tax years. Business owners may also want to review the balance between salary, dividends and employer pension contributions.

Investment income can also push people into the 100k tax trap. Interest, dividends and rental income can all count towards adjusted net income. Using ISAs, reviewing how investments are held between spouses or civil partners, and making sure allowances are used efficiently can all help reduce unnecessary tax leakage over time.

These decisions should not be made for tax reasons alone. Cash flow, pension annual allowance limits, investment risk, access to money and wider family goals all need to be considered before making changes.

How we can help with the 100k tax trap

Controlling your income to reduce your tax bill can be complex and time-consuming, but by engaging the help of a financial adviser we can advise and assist you on the best approach to suit your own personal situation and circumstances.

Please do get in touch if you have any concerns that you might be affected by this tax trap, or if you had any queries on general pension and financial planning as a whole. We’re offering anyone with £100,000 or more in pensions, investments or savings a free cash flow review worth £500. 

Arrange your free initial consultation

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.

The Financial Conduct Authority (FCA) does not regulate cash flow planning, estate planning or tax advice.