If you earn between £100,000 and £125,140, you could be paying an effective tax rate of 60% on part of your income. It sounds unbelievable, but it’s exactly what happens when your personal allowance starts being taken away.
It’s one of the harshest quirks in the UK tax system — and one most people don’t even realise they’re caught in.
Quick facts ⚡️
- The 60% tax trap kicks in once your income rises above £100,000
- You lose £1 of personal allowance for every £2 earned above that threshold
- This results in an effective marginal tax rate of 60% on that slice of income
- Add NI or student loans and the real marginal rate can hit 71%
This is not a rare corner case. Thousands of people hit this without knowing why their take-home pay suddenly feels lower than it should.
What exactly is the 60% tax trap? 😬
Most people know the higher-rate tax band is 40%. But the moment your income passes £100,000, the rules change.
Your personal allowance (£12,570 of tax-free income) starts disappearing.
For every £2 you earn over £100,000, HMRC removes £1 of that allowance.
By the time you reach £125,140, the allowance is gone entirely.
Now here’s the nasty bit:
- you pay 40% tax on the income above £100k
- AND you pay 40% tax on the allowance you’ve just lost
That double hit is what creates the effective 60% tax rate.
Example from the video explained 🎥
How Olive gets dragged into the tax trap
In the video, Olive earns £110,000.
That’s £10,000 over the threshold, which means:
- she loses £5,000 of her personal allowance
- she pays 40% on the extra £10,000
- she also pays 40% on the £5,000 of allowance she’s lost
That combined effect pushes her marginal rate to 60%.
How Olive escapes the trap
Olive pays £10,000 into her pension.
This reduces her adjusted net income back down to £100,000, which means:
- she keeps her full personal allowance
- she avoids the 60% marginal tax band entirely
- she boosts her pension for her future self
If you want a pension that’s simple, transparent and works well for small business owners or directors, Penfold is a popular option because it keeps everything clear and easy to track.
Why bonuses, side income and dividends trigger the trap
The £100k threshold isn’t based on just your salary. HMRC counts all taxable income, including:
- bonuses
- rental profits
- dividends
- savings interest
- benefits in kind
Meaning a “small” unexpected payment can drag you straight into the 60% zone.
Example:
Earn £100,000 and receive a £1,000 bonus — you might only keep £400 after tax, NI, and allowance reduction.
Timing matters a lot at this level.
Hit £125,140? Here’s what happens
At £125,140:
- your personal allowance is fully removed
- every pound you earn is taxable
- you move into the additional-rate band at 45% (48% in Scotland)
This is where good planning becomes genuinely valuable.
The childcare cliff edge 🧸
The 60% trap has another sting.
Once your adjusted net income rises above £100,000, you can lose:
- up to 30 free hours of childcare
- up to £2,000 a year in tax-free childcare
For families with two young children, losing the full 30 hours can cost over £10,000 a year.
Sometimes earning just £1 over the threshold does real financial damage.
So how do you avoid the 60% tax trap?
Here are the most effective tools:
1. Pension contributions
The cleanest fix. Pension contributions reduce adjusted net income and help you keep your personal allowance. Take a look at Penfold if you’re interested in streamlining the entire process.
2. Salary sacrifice
Cuts income tax and NI at the same time while improving pension growth.
3. Gift Aid donations
Gift Aid extends your basic-rate band, which reduces your adjusted net income.
4. Timing bonuses or dividends
A bit of planning can stop you drifting into the trap accidentally.
The bottom line
The 60% tax trap is one of the least understood but most expensive quirks in the UK tax system. The good news is there are plenty of ways to avoid it with the right planning — especially if you use pensions and Gift Aid strategically.
If you want help checking your adjusted net income or planning around the £100k threshold, get in touch. We’ll help you build a sensible structure that keeps more of your money in your pocket.
