If your income is between £100,000 and £125,140, you are caught in the 60% tax trap. This is one of the most misunderstood aspects of the UK tax system, and it means you keep only 40p of every extra £1 you earn in this bracket.
Here is why: once your income exceeds £100,000, your £12,570 personal allowance is reduced by £1 for every £2 you earn above £100,000. By the time you reach £125,140, your personal allowance is completely gone.
The maths behind the 60% rate works like this. For every extra £2 you earn, you lose £1 of personal allowance. That £1 of previously tax-free income now becomes taxable at 40%, adding 20p of tax. Combined with the 40% you already pay on the £2 earned, plus 2% National Insurance, your effective rate on each additional £1 is approximately 60%.
For example, earning £110,000 versus £100,000: the extra £10,000 costs you around £6,000 in tax and lost allowance, leaving you only £4,000 better off.
Strategies to escape the 60% tax trap include increasing pension contributions to bring your adjusted net income below £100,000, making gift aid donations which extend your basic rate band, and salary sacrifice arrangements with your employer.
If you earn £110,000, contributing £10,000 to your pension through salary sacrifice would bring your taxable income back to £100,000, restoring your full personal allowance and saving you approximately £6,000 in tax — while putting £10,000 into your retirement pot.
Use our salary sacrifice calculator to see exactly how much you could save.