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

With a Labour government now in power since July 2024, the UK's financial landscape is undergoing a review, with a particular focus on the taxation of high earners. While the freeze on income tax thresholds and allowances, a policy previously set out by the Conservative government, remains in place until at least April 2031, the current administration is facing pressure to address the impact of this fiscal drag. The previous government’s decisions have pulled more and more Britons 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 they’ll pay is 45%. However, a lesser-known 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. This is known as the 60% tax trap, and it's catching more people every year.  

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. 

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What's changed?

In the Autumn Budget 2025, 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 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. 

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%, add this to the national insurance contributions of 2% aAnd you get an effective rate of 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 who has earnings of £100,000 for the year, and they receive a bonus of £20,000.

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. 

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’.

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. 

Charitable donations 

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

Learn more about how you can avoid this 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.

Learn more about how you can avoid this 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. 

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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.