Earning more than £100,000? Here’s what you can do to avoid the 60% tax trap

A pay rise is usually a cause for celebration, until you realise it can come with an unexpectedly steep tax bill. If your income has crossed the £100,000 threshold, you might have experienced this firsthand.

It’s not because you’ve hit the additional rate of Income Tax (that only applies above £125,140 for the 2025/26 tax year), but because of the lesser-known rule that your Personal Allowance tapers once you earn over £100,000.

This gradual withdrawal means you could face an effective 60% marginal rate of Income Tax on your earnings between £100,000 and £125,140. But with the right planning, it’s possible to mitigate this trap.

Read on to learn about the 60% tax trap and how you can avoid it.

When you earn over £100,000, your Personal Allowance tapers

Most people benefit from a tax-free Personal Allowance each year, which means no Income Tax is due on that first portion of earning. In the 2025/26 tax year, the Personal Allowance is set at £12,570.

However, once your income exceeds £100,000, this allowance starts to shrink. For every £2 you earn over that threshold, £1 of your Personal Allowance is lost. This means that by the time you reach £125,140, you lose all of your Personal Allowance, and your entire income is fully taxable.

For example, say you earned £110,000, which is £10,000 over the threshold. Of that £10,000, you would pay £4,000 in higher-rate tax (40% of £10,000). But you’d also lose £5,000 of your tax-free allowance and would pay another £2,000 in Income Tax.

In this scenario, you would pay £6,000 in tax on just £10,000 of extra income – which is a rate of 60% – and that’s before factoring in National Insurance.

So, without proper planning, this tax trap can take a significant chunk out of your raise.

You can avoid the 60% tax trap by making additional pension contributions

One of the most effective ways to avoid the 60% tax trap is to contribute some of your income over £100,000 into your pension. This approach offers two benefits:

• Tax relief – Pension contributions qualify for tax relief. The basic 20% is added automatically, while higher- and additional-rate taxpayers can typically claim an extra 20% or 25% via self-assessment.

• Restoring your Personal Allowance – By reducing your adjusted net income, you may be able to reclaim some or all of your Personal Allowance and further reduce your total tax bill.

Here’s how it works.

Imagine you earn £125,140 a year. Without any pension contributions, you’d lose your full £12,570 Personal Allowance due to tapering. That means the £25,140 above £100,000 is effectively taxed at 60%, once you account for both lost allowance and higher-rate tax.

But if you contribute that £25,140 into your pension, your adjusted income drops back to £100,000. As a result, your full Personal Allowance is restored, and you benefit from significant tax relief – up to 40% on the pension contribution itself.

It’s important to note that for the 2025/26 tax year, most people can contribute up to £60,000 to their pension or 100% of their earnings (whichever is lower) across the year. If you exceed this Annual Allowance, you could face extra tax charges. In some cases there may be the potential to make contributions in excess of this amount.

And remember, your Annual Allowance may be reduced if your income is especially high or if you’ve already accessed your pension flexibly.

Salary sacrifice can also help you keep more of your earnings

If you’ve already exceeded your Annual Allowance and still want to avoid the 60% tax trap, you could explore salary sacrifice options.

This could entail foregoing a portion of your salary in exchange for employer-paid benefits – such as increased holiday entitlement, gym membership, or childcare – all of which reduce your taxable income.

Or, if you run your own business, you might consider adjusting how you extract income. For example, drawing more through dividends as they are taxed at different rates.

These strategies won’t suit everyone, so it’s worth speaking with a financial planner to find an approach tailored to your situation.

A financial planner can help you avoid the 60% tax trap

If you risk falling into the 60% tax trap, a financial planner can help.

They can guide you on how to make the most of your Annual Allowance and tap into unused allowances from previous years through the carry forward rule.

If you're already close to your Annual Allowance, a financial planner can also help you explore other tax-efficient options – such as dividend payments – which can lower your taxable income while offering additional perks.

To speak to a financial planner, get in touch.

Email info@mlpwealth.co.uk or call us on 020 8296 1799.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.