How to avoid the 60pc tax trap for £100k-£125k earners

You may be familiar with the idea of paying tax at either 20pc, 40pc or 45pc, depending on how much you earn.

However, some individuals will unwittingly end up paying income tax at a “marginal” rate of 60pc. In fact, according to HMRC data obtained via a Freedom of Information (FOI) request, around 700,000 taxpayers were caught by this marginal rate in 2024-25, up from 336,000 in 2018-19.

While this isn’t one of the official income tax bands, higher-rate taxpayers can end up paying this eye-watering rate on some of their income.

Here we take a closer look at the 60pc tax trap – and the other pitfalls that emerge once you earn more than £100,000 a year – and the steps you can take to steer clear.

In this guide, we will cover the following:

• What is the 60pc tax trap?
• What a six-figure salary means for parents
• How to avoid the 60pc tax trap
• Pension contributions
• 60pc tax trap FAQs

What is the 60pc tax trap?

The top rate of income tax is officially set at 45pc, yet a quirk in the UK tax system means people earning between £100,000 and £125,140 could find themselves paying an effective rate of 60pc – despite only officially being in the 40pc tax band.

Jason Witcombe, chartered financial planner at Empower Partners, said: “This is because as well as paying the standard 40pc income tax, you lose your tax-free personal allowance (£12,570), at a rate of £1 for every £2 of income over £100,000.”

The personal allowance is the amount you can earn each year without paying income tax, but it tapers off for higher earners. Earn more than £125,140, and this allowance vanishes altogether.

Andrew Zanelli, head of technical engagement at Aberdeen Adviser, said: “Often called a stealth tax, this 60pc rate is, understandably, an unwelcome consideration for those lucky enough to be earning six-figures.”

Parents of nursery-age children also lose out once either parent earns six figures or more. This can cost thousands of pounds in lost government support (see below for more).

The good news is, if you find yourself caught in the 60pc tax trap, there are several things you can do to reduce your overall taxable income below £100,000 and ensure you don’t pay more tax than you need to.

What a six-figure salary means for parents

Another big downside to earning £100,000 is the impact on help with childcare costs – as this is the cut-off point at which you lose your right both to tax-free childcare, as well as access to the “30 hours of free childcare a week” scheme.

Given the eye-watering costs of nursery fees, such schemes can be a real lifeline. But earn £100,001 and these benefits disappear completely.

Sarah Coles of the broker, Hargreaves Lansdown, said: “Cliff edges in the tax system always have strange distorting effects, though this one is particularly punitive.

“As if the loss of the personal allowance wasn’t bad enough, anything you earn between £100,000 and £125,140 is hit with a 60pc stealth tax. And that’s not the end of it. If you have little ones, at £100,000, you also lose your right to tax-free childcare.”

Under the tax-free childcare scheme, you can put money into the account, and for every £8 you pay in, the Government will add another £2. The system lets you claim up to £500 every three months – up to a total of £2,000 a year for each child under 12.

And the bad news doesn’t end there, because a parent earning £100,000 gets penalised yet again when it comes to the 30 hours a week of free childcare.

Ms Coles added: “If you go over the £100,000 threshold, you lose it all.”

According to calculations by the Institute for Fiscal Studies, from September 2025, a parent in London with two children at nursery who got a pay rise that put them over the £100,000 threshold would have to make £149,000 – or more – to make up for the loss of help with childcare.

Unsurprisingly, working parents are frantically searching for ways to bring their numbers down. Telegraph Money explains ways to do this, below.

How to avoid the 60pc tax trap

To avoid the 60pc tax trap, we’ve come up with four simple ways to help you avoid this hefty levy:

1. Pay more into a pension

A good first step is to look at paying into a pension – or, if you’re already tucking money away into a pot, to think about making additional pension contributions. (See details, below.)

2. Donate to charity

Making donations to a good cause is another way to reduce your income to under £100,0000 and avoid the 60pc tax trap – while also getting tax relief.

When donating (as a taxpayer), you simply need to make a Gift Aid declaration. This means the charity can then claim an additional £0.25 for every £1 donated, without costing you anything.

The benefit of doing so is receiving tax relief at your highest marginal rate – effectively reducing your tax bill.

If your scheme uses ‘relief at source’ or you make extra personal contributions, you must reclaim higher or additional-rate relief via self-assessment or HMRC’s online service. If your workplace pension uses a ‘net pay’ arrangement, full relief is given automatically and no claim is needed.

Mr Zanelli said: “If your employer runs a Payroll Giving scheme, you can donate straight from your salary – reducing your taxable income before any tax is deducted from your wage.”

3. Salary sacrifice

If your workplace runs one of these schemes, you can also use this to help dodge the 60pc tax trap – and save even more on National Insurance.

Simon Blum, director at accountancy firm, HW Fisher, said: “The concept of salary sacrifice is easy to understand. Broadly speaking, an employee formally agrees to reduce his salary, and in exchange receives an alternative benefit from the employer.

“As the employee now receives a lower salary, income tax and both the employee’s and the employer’s National Insurance is reduced.”

While you can agree to give up some salary in return for pension contributions, the scheme can also be used to purchase other non-cash benefits, such as cycle-to-work schemes, low-emission cars, or private medical insurance.

Lucie Spencer, financial planning director at wealth management firm, Evelyn Partners, said: “As with pension contributions, this reduces your salary by the cost of these benefits.”

So if, say, you are considering buying a new low-emission car – and your employer offers the scheme – you may want to explore this.

Ms Spencer added: “It could work out far more tax-efficient to make this purchase through salary sacrifice rather than your net income. And it could leave you with a greater amount of take-home pay.”

But you do need to tread with care.

Mr Blum said: “Before agreeing to a salary sacrifice arrangement, you need to be mindful of the potential impact of having a reduced salary on other matters, such as your income levels when obtaining a mortgage, as well as to your entitlement to maternity or paternity pay.”

4. Consider working less

Depending on the stage of your career, what job flexibility you have, and how much you need to earn, you might take this onerous tax band as an opportunity to work less.

Mr Witcombe said: “If you had the choice between earning £125,000 per year for working five days a week, or £100,000 per year for working four, you could conclude that you don’t gain much financial benefit from that fifth day of work each week – and drop your hours.”

Pension contributions

As mentioned above, paying more into your retirement pot is one of the quickest and simplest ways to help bring down your income, and avoid the 60pc tax trap.

Mr Witcombe said: “This is one of the most common solutions. This is because pension contributions achieve tax relief at your highest marginal rate.”

By increasing the amount you pay in, you can lower the amount of personal allowance you lose.

Mr Zanelli said: “Pension contributions come off your gross salary – meaning topping up your pension is a great way to bring your taxable income back below the 60pc threshold.”

This approach is a win-win, as it not only reduces your tax bill, but also boosts your retirement savings at the same time.

You just need to be aware that there are limits. You can generally only pay up to £60,000 a year into a pension and get tax relief.

Example of how pension contributions can cut your tax bill

Let’s say Mr Smith earns £120,000 a year. Were he to be paid his whole salary as usual, he’d be on the line to pay £39,432 in income tax.

However, if he paid a pension contribution of £16,000, which would increase to £20,000 with basic-rate tax relief, he would reduce his ‘adjusted net income’ to £100,000, and ‘escape’ the 60pc tax trap.

By effectively reducing his salary, he would ensure none of his personal allowance is lost, bringing down his income tax bill to £27,432 – a £12,000 tax reduction, while keeping the rest of the money in his pension.

Pension contributions through salary sacrifice

As mentioned above, you can make pension contributions through salary sacrifice. This is where the funds go into your pension pot before tax.

Some employers will also pass on some of their National Insurance savings – further boosting the amount saved into your pension.

Additional contributions from net income

You can choose to make additional contributions from your net income to your pension. However, if this is done in a personal pension, or Sipp, you will have to fill in a tax return to get your full tax relief, as only 20pc is paid automatically.

You also might need to if you’re using a workplace pension, but it depends on what model of tax relief your scheme uses. Speak to your HR department first.

Ms Spencer said: “If you do, 20pc basic rate tax savings are applied to the pension savings automatically. Just be aware you will need to complete a self-assessment tax return to claim the additional tax relief.”

Carry forward unused allowances

Don’t forget you can carry forward any unused annual pensions allowances from the previous three tax years and benefit from tax relief. 

For more details on how to use your pension to cut your tax bill, read our in-depth guide on how to make pension contributions to lower your tax bill.

60pc tax trap FAQs