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Beware of the 60% Income Tax Trap

A little-known tax rule means that individuals with adjusted net income of over £100,000 will be paying an effective rate of 60% income tax on a portion of their income.

More and more people are finding themselves in this situation, largely as a result of:

  • Receiving a bonus or pay rise (wage inflation has risen by 7.3% in the last year)
  • Higher rates of interest on savings (the Bank of England Base Rate is currently 5.25%)
  • Increases in rental income
  • Encashing an investment bond (as these are subject to income tax)

Income Tax Summary

Currently in the United Kingdom, income tax is structured as follows:


Income Threshold Income Tax Rate
£0 – £12,570 0% – Personal Allowance
£12,571 – £50,270 20% -Basic Rate
£50,271 – £125,140 40% – Higher Rate
Over £125,140 45% – Additional Rate


However, once your adjusted net income* reaches £100,000 in a tax year, your Personal Allowance is reduced by £1 for every £2 that the £100,000 threshold figure is exceeded.

This means that someone with adjusted net income of £125,140 will have their Personal Allowance fully tapered to Nil.

*adjusted net income is all taxable income, less pension contributions and gift aid donations

60% Income Tax

The consequences of the Personal Allowance being tapered is that the slice of income between £100,000 and £125,140 will suffer an effective tax rate of 60%.

This occurs because for every £2 over £100,000, an additional £1 of your income will be pushed from what was your Personal Allowance (at 0%), into the Higher Rate tax bracket – an increase of 40% in the tax due on the equivalent of half the income over £100,000, creating an effective 20% increase in tax.

Scaled up, if your Personal Allowance is fully tapered (ie your adjusted net income is over £125,140), there will be an additional 40% tax due on £12,570 (the amount that would have been your Personal Allowance), equating to an additional tax charge of £5,028.

In addition, you would be paying 40% income tax in the usual way on all income within the higher rate tax bracket.


If you had adjusted net income of £120,000 (£20,000 above the threshold), you would:

  • Pay 40% Higher Rate Income Tax on the £20,000 (£8,000)


  • Lose £10,000 of your Personal Allowance, resulting in £10,000 now being subject to Higher Rate Income Tax at 40% (£4,000) which is an effective rate of 20% on the income over £100,000 (£4,000/£20,000 = 20%)

The £20,000 of income over the £100,000 threshold is therefore subject to total tax of £12,000, which is an effective rate of 60%.


How you can regain your Personal Allowance and achieve income tax savings of 60%

All is not lost if your adjusted net income has exceeded the £100,000 threshold.

The most effective way of combating the 60% tax charge is to make a pension contribution for the tax year in question, equivalent to the level of income over the £100,000 threshold.

The outcome will be a reduction in your adjusted net income equivalent to the amount of the gross contribution.

For example, if you had an adjusted net income of £120,000 you could make a net pension contribution of £16,000 which would result in:

  • The £16,000 being grossed up to £20,000 within the pension through 20% basic rate tax relief at source.
  • An additional 20% tax relief reclaimed through your self assessment tax return (to provide you with total 40% higher rate income tax relief)
  • Your adjusted net income being reduced by £20,000 to £100,000, resulting in your Personal Allowance being increased by £10,000 to the full amount. This will save a further £4,000 of income tax (40% x £10,000).


The total income tax saved by making this £20,000 gross contribution would be £12,000 – equivalent to 60%.

Other benefits of making a pension contribution would be:

  • Tax free income and growth within the pension
  • Monies within the pension sitting outside of your estate for inheritance tax purposes, potentially saving 40% in inheritance tax.
  • Building your entitlement to tax-free cash, up to a limit.
  • Making use of your pension Annual Allowance, which has recently increased to £60,000.


An alternative to making a pension contribution is to make a charitable donation via gift aid in order to reduce your adjusted net income, however in this instance you would be relinquishing ownership of the monies.

To speak to a Financial Planner about your own tax planning please contact us on 0330 320 9280, email or complete our online enquiry form.

The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice.

You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.

Craven Street Financial Planning Limited is authorised and regulated by the Financial Conduct Authority.

Bethany Turton
Chartered Financial Planner
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