Earning over £100k? You might be losing more than half your pay rise to the taxman.
The "Hidden" Tax Rate
In the UK, the official tax bands stop at 45%. So where does 60% come from?
It’s not an official tax band. It’s an anomaly caused by the withdrawal of your tax-free Personal Allowance.
Once you earn over £100,000, your Personal Allowance (£12,570) starts to disappear. For every £2 you earn above £100k, you lose £1 of allowance.
The Maths of the Trap
- You pay 40% Income Tax on the extra £1 earned.
- You lose 50p of tax-free allowance, which becomes taxable at 40% (adding another 20% effective tax).
- Total Effective Tax Rate = 60%
This affects anyone earning between £100,000 and £125,140.
Effective Tax Rate by Income
The 60% "Trap" Zone (£100k - £125k)
Are you falling into the trap?
If you earn £110,000, the top £10,000 of your income is effectively taxed at 60%.
- You Earn: £10,000
- Tax Taken: £6,000
- You Keep: £4,000
Also, watch out for the "Childcare Cliff Edge". If your "Adjusted Net Income" crosses £100k by even £1, you lose eligibility for Tax-Free Childcare and the 30-hours free childcare offer. That can be worth thousands more.
How to Escape It
The good news is that this trap is based on your Adjusted Net Income, not your gross salary.
Contribution to a pension reduces your Adjusted Net Income.
The Smart Escape Route
If you earn £110,000 and put £10,000 into your pension:
- Your "Adjusted Income" drops back to £100,000.
- You reclaim your full Personal Allowance.
- You avoid the 60% tax charge entirely.
You effectively turn that £6,000 tax bill into pension savings for yourself.
Summary
- Danger Zone: £100,000 to £125,140.
- Impact: 60% effective tax rate, plus loss of childcare benefits.
- Fix: Pension contributions can bring your taxable income back down below £100k, reclaiming your allowances.
Guidance, not advice.
Tax rules are subject to change. This guide explains the mechanism of the Personal Allowance taper for the 2025/26 tax year.
This guide is for educational purposes only and does not constitute financial advice.
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