For professionals earning between £100,000 and £125,140, the effective marginal tax rate is not 40%. It is 60%. This article explains why that happens, who it affects, and what can be done about it.
IMPORTANT:
“Tax treatment varies according to individual circumstances and is subject to change.”
“Tax Planning is not regulated by the Financial Conduct Authority.”
Q: What is the 60% tax trap?
A: It is the effective tax rate created when the personal allowance tapers away for earnings between £100,000 and £125,140. For every £2 earned above £100,000, £1 of personal allowance is lost, creating a marginal rate of 60% on that portion of income.
The standard personal allowance in 2025/26 is £12,570. This is the amount you can earn before paying any income tax. However, for individuals with adjusted net income above £100,000, HMRC reduces this allowance by £1 for every £2 of income above that threshold.
Once income reaches £125,140, the personal allowance is eliminated entirely. The effect is that income in the £100,000 to £125,140 band is taxed at 40% on the income itself, plus 20% more through the lost allowance, creating an effective rate of 60%.
This affects far more people than it once did. The £100,000 threshold has not increased since it was introduced, meaning that inflation and salary growth have steadily pulled more professionals into this band.
Once we mapped out the taper and showed her what it was costing, she was understandably frustrated. We restructured her pension contributions to bring adjusted net income below £100,000, saving her approximately £4,800 in tax that year.
Who is most at risk?
The trap catches professionals who earn a base salary just above £100,000 and who receive bonuses or other variable income that pushes them into the taper band. It is common among senior lawyers, consultants, finance professionals, NHS consultants, and executives in the £100,000 to £150,000 salary range.
It also affects individuals who receive income from multiple sources, including rental income, dividends from a company, or freelance earnings on top of employment income. Even a modest side income can push someone from below £100,000 into the taper zone.
Adjusted net income includes employment income, self-employment profits, rental income and dividends, but it can be reduced by pension contributions and certain other reliefs. That distinction is important because it creates a planning opportunity.
What is adjusted net income and why does it matter?
Adjusted net income is the figure HMRC uses to assess whether and by how much your personal allowance should be tapered. It is not the same as your gross salary.
The calculation starts with your total income from all sources, then deducts gift aid donations and the gross value of personal pension contributions. Employer pension contributions made through salary sacrifice reduce your gross pay before HMRC calculates your income, which is why salary sacrifice and personal contributions work differently in this context.
Understanding what counts as adjusted net income is the foundation of managing the trap. Many people assume their salary is the only figure that matters and miss opportunities to reduce the number that actually determines their tax position.
A client came to me earning £112,000 in salary plus £6,000 in rental income, giving an adjusted net income of £118,000. He had not connected the rental income to the personal allowance taper and was significantly over-paying tax as a result. We increased his pension contributions to bring adjusted net income to £99,000, recovering his full personal allowance and reducing his tax bill by over £7,000.
How do pension contributions help?
Pension contributions are the most widely used tool for managing the 60% trap. Personal contributions to a SIPP or workplace pension reduce your adjusted net income on a pound-for-pound basis. Employer contributions via salary sacrifice reduce gross pay before tax is calculated.
For someone earning £115,000, increasing pension contributions by £15,000 can bring adjusted net income to £100,000, fully restoring the personal allowance and saving approximately £6,000 in income tax. The net cost of the pension contribution is effectively reduced by that tax saving.
The annual allowance for 2025/26 is £60,000, though this reduces for very high earners through the taper. For those with available allowance, pension contributions remain one of the most tax-efficient uses of income available in the UK.
What role does salary sacrifice play?
Salary sacrifice is an arrangement where an employee agrees to accept a lower gross salary in exchange for an employer pension contribution of equivalent value. Because the contribution comes from the employer, it does not form part of adjusted net income for personal allowance taper purposes.
For someone caught in the 60% trap, salary sacrifice can be particularly effective. It reduces gross pay, reducing adjusted net income, and the employer contribution goes directly into the pension without being subject to income tax or National Insurance contributions.
Not all employers offer salary sacrifice, and it requires a formal amendment to the employment contract. However, where it is available, it is typically the most efficient route to reducing adjusted net income for employees earning above £100,000.
A director earning £118,000 was making personal pension contributions and claiming relief through self-assessment, unaware that salary sacrifice was available through his employer.
Switching to salary sacrifice on £18,000 of contributions reduced his gross pay to £100,000, recovered his personal allowance, and also saved National Insurance contributions for both him and his employer.
What are the implications for bonuses?
Year-end bonuses are a common trigger for the 60% trap. A professional earning £96,000 in base salary who receives a £20,000 bonus will find that £16,000 of that bonus falls within the taper zone and is taxed at an effective rate of 60%.
One option is to agree with an employer that some or all of a bonus is paid directly into a pension as an employer contribution, where permitted. This avoids the bonus being counted as personal income at all.
Where that is not possible, making a personal pension contribution before the tax year end to offset the bonus income is an alternative. Timing matters here, as the contribution must be made within the same tax year for which the deduction is claimed.
Does the trap apply to those earning above £125,140?
Above £125,140 the personal allowance is fully withdrawn. There is no longer a 60% effective rate in the technical sense, but the income tax rate remains 45% on earnings above £125,140. The 60% band only applies within the taper range.
However, those earning above £125,140 face a different but related issue: the tapered annual allowance. For tax years from 2023/24 onwards, individuals with threshold income above £200,000 and adjusted income above £260,000 have their annual pension allowance reduced, potentially down to a minimum of £10,000.
For those in this position, pension planning still matters but requires more careful modelling of allowances across tax years, including carry forward from unused allowances in the three prior years.
Is there a planning deadline each year?
Yes. The UK tax year runs from 6 April to 5 April. Pension contributions must be made before 5 April to reduce adjusted net income for that tax year. Any contribution made after that date counts in the following year.
This makes January to March a critical planning window for high earners. It is the period when projected full-year income becomes clear and when there is still time to act. Many of the clients I work with use this window to assess whether additional pension contributions are warranted before the year closes.
Carry forward allows unused annual allowance from the three prior tax years to be used in the current year, subject to having been a member of a registered pension scheme throughout. This can significantly increase the amount that can be contributed in a single year where income allows.
Where should I start?
The first step is understanding your adjusted net income, not just your gross salary. That means accounting for all income sources and identifying what can be deducted.
The second step is modelling the tax saving from pension contributions at different contribution levels. For most people in the taper band, the calculation will show that the effective cost of additional pension contributions is substantially lower than the headline rate suggests.
The third step is reviewing whether the mechanism for contributions, personal contributions, salary sacrifice or employer contributions, is optimised for your specific situation. The answer is different depending on employment structure, income level and existing pension provision.
Frequently Asked Questions
Does the 60% trap apply to everyone earning over £100,000?
It applies to everyone with adjusted net income between £100,000 and £125,140. If your income is above £125,140, the personal allowance is fully gone and the trap no longer applies, though other high-income planning considerations remain.
Can I reduce my adjusted net income below £100,000 if I earn £120,000?
What is the 2025/26 annual allowance?
Do employer contributions count toward adjusted net income?
Concerned about the 60% tax trap? Ark Wealth Management can model the impact on your income and identify the most effective strategies for your situation.
Visit arkwm.co.uk to arrange a confidential conversation.
Risk Warning
The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.
Financial Disclaimer
This article is for informational purposes only and does not constitute personalised financial advice. Tax rules and allowances are subject to change. The information contained here is based on current UK legislation and HMRC guidance. Past performance is not a guide to future performance. The value of investments can fall as well as rise and you may get back less than you invest. Ark Wealth Management is an appointed representative of Quilter Financial Services Ltd which is authorised and regulated by the Financial Conduct Authority. Always seek independent financial advice tailored to your personal circumstances before making financial decisions.