The 60% Income Tax Trap: How High Earners Lose Their Personal Allowance

The Hidden 60% Tax Band

Most UK taxpayers are broadly aware of the three income tax rates: basic (20%), higher (40%), and additional (45%). What is less widely understood is that a fourth effective rate — 60% — applies to income between £100,000 and £125,140 in the 2026/27 tax year.

This rate does not appear on any HMRC rate card. It arises because the personal allowance — £12,570 for 2026/27 — is withdrawn at a rate of £1 for every £2 of adjusted net income above £100,000. By the time income reaches £125,140, the personal allowance is extinguished entirely.

The mechanics are straightforward:

• On income between £100,000 and £125,140, you pay 40% higher rate income tax in the normal way.
• Simultaneously, for every £2 of income in this band, you lose £1 of personal allowance. The income that previously sheltered by the personal allowance now becomes taxable at 40%.
• Effective rate: 40% (direct) + 40% × 50% (on allowance lost) = 60%.

For someone whose income sits in this range, each additional £1 of income costs 60p in tax. This is the 60% trap, and for high earners — professionals, company directors, those exercising share options, or individuals drawing pension income — it is a significant planning issue.

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Who Falls into the Trap?

The 60% zone affects anyone whose adjusted net income exceeds £100,000 in a tax year. Common triggers include:

• Salary or bonus: Employees whose gross employment income crosses £100,000.
• Dividend income: Owner-managed business directors taking dividends in addition to salary.
• Pension drawdown: Individuals drawing taxable pension income (the 75% taxable element of UFPLS or drawdown) who push adjusted income above £100,000.
• Rental income: Landlords whose total income including rent crosses the threshold.
• Share option exercises: EMI or CSOP options generating employment income on exercise.
• Capital gains: Note that capital gains do not directly affect adjusted net income for personal allowance purposes — but the interaction with income can affect the tax rate on gains.

The trap is particularly acute for those who receive a large one-off amount in a tax year — a bonus, property sale, or inheritance — pushing income briefly into the 60% zone when they are otherwise a 40% taxpayer.

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Adjusted Net Income Explained

The 60% calculation is based on adjusted net income, not gross income. This distinction is critical because pension contributions reduce adjusted net income.

Adjusted net income = total income – pension contributions made under the relief-at-source method (grossed up) – gift aid donations (grossed up) – certain other deductions.

For most employed individuals, the relevant figure is:

Gross salary + other income – personal pension contributions (gross equivalent)

Employer pension contributions under salary sacrifice reduce gross salary directly (they never appear as the employee's income), so they reduce the starting point before reaching the £100,000 threshold.

Personal pension contributions (made to a relief-at-source SIPP or personal pension) are added back at the gross amount to reduce adjusted net income.

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Pension Contributions as the Solution

A pension contribution is the most tax-efficient way to escape the 60% trap because every £1 of adjusted net income reduced by a pension contribution saves 60p of tax where income sits in the £100,000–£125,140 band.

Example

Sophie is employed on a salary of £115,000 in 2026/27. Her adjusted net income before pension contributions is £115,000 — £15,000 inside the 60% trap zone.

If Sophie makes a personal pension contribution of £15,000 (net £12,000 with basic rate relief added at source), her adjusted net income falls to £100,000 — precisely at the threshold. She has eliminated the 60% trap entirely.

Tax saving: £15,000 × 60% = £9,000. Plus, the £15,000 gross pension contribution grows within the pension free of income tax and capital gains tax.

Via Salary Sacrifice

If Sophie's employer operates salary sacrifice, she can sacrifice £15,000 of salary. This:

• Reduces her gross salary to £100,000 (adjusted net income at threshold).
• Saves Sophie's employee National Insurance (8% on earnings in this band).
• Saves the employer's National Insurance (15% from 6 April 2025).
• The employer may pass some or all of its NI saving into Sophie's pension.

The total value is even higher than a personal contribution alone.

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The Annual Allowance Constraint

Pension contributions used to mitigate the 60% trap are subject to the annual allowance — £60,000 in 2026/27. The annual allowance covers both employer and employee contributions (money purchase) and the value of DB pension accrual.

For very high earners (adjusted income above £260,000), the tapered annual allowance reduces the allowance — potentially to as low as £10,000. At that level, the scope to use pension contributions to escape the 60% trap is more limited.

Carry forward of unused annual allowance from the previous three tax years can allow a larger contribution in a single year, providing the individual has been a member of a registered pension scheme throughout.

Compliance caveat: The tapered annual allowance rules are complex. An annual allowance charge applies if total contributions exceed the allowance. Seek regulated financial and tax advice before making large pension contributions.

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Childcare and Other Interactions

The 60% trap also triggers the loss of:

• Free childcare hours: Tax-free childcare and 30 free hours are lost when adjusted net income exceeds £100,000 for either parent. For families with young children, the value of this lost childcare support — which can exceed £10,000 per year — makes the effective marginal rate even higher.
• High Income Child Benefit Charge (HICBC): Applies where either partner's adjusted net income exceeds £60,000. It is fully withdrawn by £80,000. This is a separate trap but often compounds the 60% issue for families in the £60,000–£80,000 range.

A pension contribution that brings adjusted net income below £100,000 also restores free childcare entitlement — substantially increasing the economic value of the contribution.

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The Upper Threshold

At £125,140 the personal allowance is fully withdrawn. From that point, additional income is taxed at 40% (or 45% for income above £125,140 under additional rate rules). There is no 60% effective rate above £125,140 — it applies only within the withdrawal band.

For individuals with income materially above £125,140, the planning consideration shifts to the additional rate (45%) and, if income is above the tapered AA threshold, restrictions on pension contributions. However, pension contributions remain effective at 45% relief for additional rate taxpayers.

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Planning Strategies in Practice

Several techniques are commonly used by higher earners:

1. Maximise pension contributions to bring adjusted net income to £100,000. This is the primary and most efficient strategy.
2. Gift Aid donations reduce adjusted net income in the same way as pension contributions. For those who give to charity, this can complement pension planning.
3. Defer income where possible. In some cases — for example, a director of an owner-managed business — income can be deferred to a tax year where it falls below £100,000.
4. Salary sacrifice reduces gross income before tax is calculated, and saves NI as well as income tax.
5. Enterprise Investment Scheme (EIS) or Seed EIS: Carry-back relief can reduce adjusted net income — but these investments carry significant risk and are not suitable for most investors.

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Compliance and Risk Warnings

Tax rules are set by Parliament and can change. The personal allowance withdrawal mechanism has existed in its current form since 2010, but the threshold at which it begins (£100,000) and the rate of withdrawal could change in future Budgets.

Pension annual allowance rules, including carry forward and the tapered annual allowance, are complex. Errors can result in an annual allowance charge — effectively clawing back tax relief already received. All pension contribution strategies should be reviewed by an FCA-authorised financial adviser or qualified tax adviser in the context of your full financial picture.

Investments within pensions can fall as well as rise. Tax treatment depends on individual circumstances and applicable tax law, which may change in future. Professional advice should be sought before acting on any of the information in this guide.

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How Global Investments Can Help

At Global Investments, we work with high-earning professionals, business owners, and internationally mobile individuals who face exactly this kind of planning complexity. Our team has deep experience helping clients restructure their income to avoid unnecessary tax, including the 60% trap.

We work alongside qualified tax advisers and FCA-regulated financial planners to develop integrated strategies that cover pension contributions, salary sacrifice, investment structuring, and longer-term retirement planning. Whether you are approaching the £100,000 threshold for the first time or managing large bonuses and pension carry-forward calculations, we can help you navigate the detail.

Contact Global Investments to discuss your situation in confidence.