Why Some UK Earners Face a 60% Tax Rate – and How to Reduce It

Understanding the Hidden 60% Tax Rate

On the surface, the UK income tax system appears simple, with three main tax bands: basic rate (20%), higher rate (40%), and additional rate (45%) for taxpayers in England, Wales, and Northern Ireland. However, for many higher earners, the reality is more complex.

There is a lesser-known feature of the tax system that can push the effective tax rate as high as 60% on part of a person’s income. In the 2023/24 tax year, around 634,000 taxpayers were affected, and projections suggest this number could rise beyond one million by 2027/28.

Why Income Between £100,000 and £125,140 Is Taxed So Heavily

The reason for the 60% rate lies in the withdrawal of the personal allowance. For the 2025/26 tax year, the personal allowance remains frozen at £12,570.

Once a taxpayer’s adjusted net income (ANI) exceeds £100,000, their personal allowance is reduced by £1 for every £2 earned over that threshold. When income reaches £125,140, the allowance is completely lost.

This withdrawal, combined with higher-rate income tax, creates an effective 60% marginal tax rate on income earned between £100,000 and £125,140.

How the 60% Tax Rate Works in Practice

Let’s look at a simple example.

If a person’s income increases from £100,000 to £101,000:

• The additional £1,000 is taxed at 40%, resulting in £400 of tax.

• At the same time, the personal allowance is reduced by £500, meaning an extra £500 becomes taxable at 40%, adding £200 of tax.

Total tax on the £1,000 increase:
£400 + £200 = £600

This means £600 of tax is paid on £1,000 of extra income, resulting in an effective tax rate of 60%.

Ways to Reduce Exposure to the 60% ‘Tax Trap’

Although this situation cannot be avoided entirely, there are strategies that can significantly reduce its impact. These approaches ensure additional income is used more efficiently rather than lost to tax.

1. Pension Contributions

Making pension contributions is one of the most effective ways to tackle the 60% tax rate. Because the withdrawal of the personal allowance is based on adjusted net income, reducing ANI below £100,000 restores the full allowance.

Pension contributions reduce ANI by the gross amount paid into the scheme, whether through:

• Relief-at-source pensions, or

• Occupational schemes using the net pay arrangement

In practical terms, this means that every £1 paid into a pension can save up to 60p in income tax.

2. Salary Sacrifice Arrangements

Salary sacrifice can be even more efficient. Under this arrangement, an employee gives up part of their salary in exchange for non-cash benefits, most commonly pension contributions.

Because the sacrificed salary is never received:

• It is not subject to income tax

• It is not included in adjusted net income

• Both employee and employer save National Insurance contributions

Typically, employees save 2% in NICs, while employers save 15%. This reduces exposure to the 60% rate at source and increases overall tax efficiency.

Note: At the time of writing, the Autumn Budget 2025 has not yet taken place. There are rumours that a £2,000 cap may be introduced on pension salary sacrifice before NICs apply, but this has not been confirmed.

Practical Planning Opportunities

Salary sacrifice can apply to more than just pensions. Common options include:

• Cycle-to-work schemes

• Pension contributions

• Leasing electric vehicles

Fully electric cars currently attract a low benefit-in-kind tax charge, often making them more cost-effective than private leasing. The sacrificed salary reduces adjusted net income, meaning income tax and NICs are avoided on that amount.

If these arrangements reduce gross income below £100,000, the personal allowance can be fully retained.

                                                       For more information, Book a Free Consultation