The 60% tax trap: smart moves to keep more of your earnings

The UK tax system has an unusual feature that catches many higher earners: the withdrawal of the personal allowance once adjusted net income (ANI) exceeds £100,000. Between £100,000 and £125,140, every £2 of extra income removes £1 of personal allowance.

Why this creates a 60% marginal rate

In this income band, an additional £1 is taxed as follows:

• 40p at the higher rate, and
• 20p due to the lost personal allowance (50p of allowance × 40%).

Total: 60p tax for every £1 of income – a surprisingly steep rate.

Adjusted net income (ANI) = total taxable income minus gross personal pension contributions, minus gross Gift Aid donations (and certain other reliefs).

Who is affected

Employees, directors and professionals with income around or above £100,000 – particularly those receiving bonuses, dividends or one-off payments, and anyone whose income moves in and out of this band.

Example

Someone earning £110,000 has £10,000 over the £100,000 threshold, reducing their personal allowance by £5,000.

A £10,000 gross pension contribution brings ANI back down to £100,000, restoring the allowance and saving around £6,000 in tax – plus the benefit of pension tax relief. Actual savings depend on personal circumstances.

Practical ways to reduce exposure

Quick wins

• Personal pension contributions – Can restore the allowance, subject to the annual allowance and taper rules.
• Gift Aid donations – Reduce ANI and extend the basic rate band; higher-rate relief can also be claimed.
• Salary sacrifice – Exchanging pay for pension contributions or benefits (e.g., low benefit-in-kind electric vehicles) can reduce both income tax and NICs.

Longer-term planning

• Timing of bonuses/dividends – If possible, defer to a year when ANI is lower or after making pension or Gift Aid contributions.
• Income smoothing for owner-managers – Adjusting how much is drawn each year (e.g. £100,000 one year and £150,000 the next) can reduce overall tax compared to consistently sitting in the £100,000–£125,140 band. Potential savings over two years could be around £3,725.

This approach only works where income timing is flexible and should always be considered alongside cash flow, commercial needs and long-term planning.

Pitfalls to avoid

• Pension annual allowance and taper rules – check carry-forward options.
• Confusing ANI with adjusted income (used for pension taper).
• Scottish taxpayers – Income tax bands differ, and the effective marginal rate may be even higher.

Bottom line

If your income falls between £100,000 and £125,140, you could face an effective 60% tax rate. With smart planning – pensions, Gift Aid, salary sacrifice and careful timing – you may be able to reduce your tax exposure and restore your personal allowance. For tailored tax advice, contact JW Hinks today – our specialists are ready to help you keep more of what you earn.