On paper, the UK income tax system looks simple enough: most people fall into the 20%, 40% or 45% tax bands. But for higher earners, there’s a hidden quirk that pushes the real marginal tax rate all the way up to 60%.
It surprises a lot of taxpayers — and it catches more people every year. In 2023/24, around 634,000 people fell into the 60% band, and that figure could rise to over a million by 2027/28.
So why does this happen, and what can you do to avoid the trap? Let’s break it down.
Where the 60% Tax Rate Comes From
The issue arises because the personal allowance (£12,570) is gradually withdrawn once your adjusted net income (ANI) exceeds £100,000.
Here’s how it works:
- For every £2 you earn above £100,000
- You lose £1 of your personal allowance
- By the time your income reaches £125,140, the allowance is gone completely
This clawback creates a double taxation effect on income between £100,000 and £125,140 — pushing the effective marginal rate to 60%.
Example: Earning an Extra £1,000
Let’s say your income increases from £100,000 to £101,000.
- You pay 40% tax on the £1,000 = £400
- You lose £500 of personal allowance
- That extra £500 becomes taxable at 40% = £200
Total tax on your extra £1,000?
£400 + £200 = £600, which is 60%.
It’s easy to see how this becomes a costly trap for many high earners.
Two Ways to Reduce or Eliminate the 60% Tax Trap
The good news? There are legitimate planning strategies to avoid falling into the 60% band. They don’t give you more take-home pay immediately — but they make sure your money works harder for you instead of vanishing into tax.
- Make Pension Contributions
Pension contributions reduce your adjusted net income, which means they can help restore lost personal allowance.
Because every £1 contributed saves 60p in tax, this is one of the most efficient ways to mitigate the 60% band.
Contributions can be made:
- through personal pensions (relief at source), or
- via workplace schemes (net pay arrangement)
A well-timed contribution can bring your ANI below £100,000 — restoring your full personal allowance and boosting your pension at the same time.
- Use Salary Sacrifice
Salary sacrifice can be even more tax-efficient than direct pension contributions.
Under salary sacrifice:
- You give up part of your salary
- Your employer provides a non-cash benefit instead — most commonly an employer pension contribution
- The sacrificed salary isn’t taxed and doesn’t count toward ANI
This means:
- You avoid the 60% tax band
- You save 2% employee NIC
- Your employer saves 15% employer NIC
- They may even pass some of that saving back to you
This is one of the most effective tools for higher earners looking to optimise tax.
A note of caution:
Rumours suggest the 2025 Autumn Budget may introduce a £2,000 cap on NIC-free pension salary sacrifice, but details are still to come.
Practical Tip: Salary Sacrifice Isn’t Just for Pensions
While pensions are the most common use, you can also salary sacrifice for:
- Cycle-to-work schemes
- Fully electric company cars
- Other approved benefits
Leasing an electric car through salary sacrifice is particularly attractive. Benefit-in-kind rates for electric vehicles remain low, and the salary sacrificed reduces ANI — which may even help you keep your full personal allowance.
Worried You’re Being Hit by the 60% Rate?
You’re not alone — and there are smart ways to minimise it. Whether it’s pension planning, salary sacrifice, or reviewing your overall remuneration strategy, Jon and the team at Jon Davies Accountants can help you find the most tax-efficient route for your situation.
Get in touch if you’d like guidance tailored to your income and future plans.
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Any questions?
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