The 60% tax trap: the £100k problem explained

Earning over £100,000 should feel like progress. For many people, it does – until they notice that a pay rise, bonus or extra dividend doesn’t seem to improve their take-home pay in the way they expected.

That’s because the UK tax system contains a hidden tax band that comes into play when you earn between £100,000 and £125,140. Anything you earn between those amounts is hit by an effective tax rate of 60%. This effective rate doesn’t appear on standard tax tables, and it catches out directors, senior managers and high-earning employees every year.

In this article, we explain what the “60% tax trap” is and show you some practical steps to avoid it.

The myth vs the reality

The myth

“I pay 40% tax until I reach £125,140, then 45% after that.”

The reality

Between £100,000 and £125,140, each additional pound you earn can be taxed at an effective rate of 60%, due to the withdrawal of your Income Tax tax-free personal allowance.

This isn’t a new tax band in name, but it behaves like one in practice.

How the 60% tax trap is triggered

Nearly everyone is entitled to a personal allowance for Income Tax. This is currently £12,570, and it is the amount of income you can earn that’s free of tax.

However, once your income reaches £100,000, that allowance starts to be withdrawn.

The rule is simple

For every £2 you earn over £100,000, you lose £1 of your Personal Allowance. That lost allowance is no longer tax-free, so it becomes taxable at 40%.

What this means in practice

For every £100 of income above £100,000 that you earn:

• £40 is paid in higher-rate income tax (40%)
• £50 of your lost tax-free allowance becomes taxable
• That £50 is taxed at 40% = £20
• Total tax on £100 of income: £60

In other words, you are paying an effective marginal tax rate of 60%. This continues until your Personal Allowance is fully removed at £125,140. (This is also when you begin to be taxed at the “additional” rate of 45%)

An extra cliff edge for parents

For parents, the £100,000 threshold matters for another reason.

If the Adjusted Net Income (ANI) for either parent exceeds £100,000, you lose eligibility for:

• Tax-free childcare, and
• 30 hours’ free childcare

There is no gradual taper. If your ANI is £100,001, the entitlement is lost entirely. (Adjusted Net Income is broadly your total taxable income, minus things like pension contributions and Gift Aid.)

In many households, the combined effect of extra tax and lost childcare support means that a modest pay rise or bonus leaves the family significantly worse off.

The solution: pensions and salary sacrifice

The reason the 60% tax trap is so frustrating is that it feels arbitrary. The reason it’s fixable is that it’s based on Adjusted Net Income, not headline salary.

Pension contributions reduce ANI, which means they can restore your Personal Allowance – and, for parents, protect childcare eligibility.

Salary sacrifice vs employer contributions

Employees typically use salary sacrifice to bring their ANI below £100,000. This is where part of your salary or bonus is given up and paid directly into a pension by the employer.

On the other hand, company directors often use employer pension contributions. These are paid by the company, rather than personally.

Both can be effective, but salary sacrifice is often the cleanest route for employees as it also saves them National Insurance.

Example 1: £110,000 salary using salary sacrifice

You earn £110,000. Without planning, the £10,000 above £100,000 sits in the 60% band.

You agree to a £10,000 salary sacrifice, which is paid into your workplace pension.

• Your contractual pay falls to £100,000
• Your Adjusted Net Income falls back to £100,000
• Your personal allowance is restored in full

By doing this, you save 40% Income Tax plus 2% Employee National Insurance, meaning the effective relief is actually 62%.

This means that, instead of losing a large share of that £10,000 to tax, you invest it into your pension to improve your income when you retire.

Example 2: The bonus that accidentally triggers the trap

You earn £95,000 and receive a £12,000 bonus. This takes your income to £107,000, meaning that £7,000 of it falls into the 60% tax trap.

If your employer allows it, you could solve the problem by sacrificing £7,000, which is then paid into your pension. As a result:

• Your ANI remains at £100,000
• You avoid the 60% band entirely
• You still receive £5,000 of the bonus as cash (taxed normally)

It’s worth noting that bonuses are one of the most common ways people fall into the 60% trap by accident.

Example 3: Protecting childcare eligibility

Your ANI is £101,000 and you have young children. Even earning £1 above £100,000 is enough to lose tax-free childcare and 30 hours; free childcare.

By salary sacrificing £1,000 into your pension:

• Your ANI falls to £100,000
• Childcare eligibility is preserved
• The cost to you is far lower than the value of the childcare support retained

This is another reason why even relatively small pension contributions can have an outsized impact around the £100,000 mark.

A practical note on timing

Salary sacrifice is powerful, but you need to realise it isn’t always flexible:

• Some employers only allow changes at set points in the year
• Bonuses usually need to be sacrificed before they are paid
• Workplace schemes may impose their own limits

This is why advance planning matters – leaving decisions until the end of the tax year can be too late.

The limits of the pensions fix (and where mistakes happen)

Pension contributions are not unlimited. There are two relevant and separate limits, and confusing them can lead to unexpected tax charges.

1. The Annual Allowance (£60,000)
   Most people can contribute up to £60,000 per tax year into pensions, across all contributions (employee and employer combined). If you have unused allowance from the previous three tax years, you may be able to use carry forward to increase what you can contribute in the current year. This is often essential when trying to fix a one-off income spike.
2. The earnings limit (the “100% rule”)
   Your personal pension contributions cannot exceed 100% of your relevant UK earnings for the year. For example, if you earn £110,000, you cannot personally contribute more than £110,000. Employer contributions are not subject to this rule, which is why they are particularly useful for company directors.

A note on Gift Aid

While pensions are the most common way to reduce Adjusted Net Income, Gift Aid donations work in exactly the same way.

When you make a Gift Aid donation, the gross value of your gift is treated as reducing the income figure used for the taper when calculating the 60% trap. This means a charitable donation can legally “win back” your tax-free Personal Allowance.

In the 60% band, you can effectively give £1 to charity for a net cost of just 40p. While the money is no longer yours (unlike a pension contribution), it is a highly efficient way to manage your tax bill if you have philanthropic goals.

Need help with the 60% tax trap?

Addressing the 60% tax trap is about legally avoiding unnecessarily high tax on income that could be structured more efficiently. It is one of the clearest examples of why personal tax planning still matters, even for high earners who feel broadly well organised.

If you’re unsure whether you have sufficient “carry forward” allowance, whether salary sacrifice is available to you, or whether the pension taper could apply, professional advice before the tax year ends can make a meaningful difference.

Concerned you might be paying too much? Get in touch to arrange a Personal Tax Review with THP – just fill in the form below and we’ll call you back.