The 60% tax trap between £100,000 and £125,140
Most people who earn over £100,000 pay Income Tax at 40% on the top slice of their pay. But between £100,000 and £125,140, each extra pound costs 60% in Income Tax, because the tax-free Personal Allowance shrinks as pay goes up.
Why the rate is higher than the higher rate
Everyone starts with a Personal Allowance of £12,570, the part of income that is tax-free. Once your adjusted net income goes over £100,000, you lose £1 of that allowance for every £2 of income above the limit. By £125,140 it has gone.
So a £1 pay rise in this range does two things. The pound itself is taxed at 40%. It also turns 50p of your allowance into taxable income, which is taxed at 40% too. The two together make 60%. Add 2% employee National Insurance on pay above the upper earnings limit, and an employee keeps less than 40p of the pound.
What a pay rise is worth in the trap
Take a salary outside Scotland that goes from £100,000 to £110,000. The extra £10,000 of pay brings £6,000 more Income Tax and £200 more National Insurance. Take-home pay goes up by £3,800 a year.
In Scotland the pay in this range falls in a higher Scottish band, so the rate on each extra pound is 67.5%.
How pension contributions change it
The limit applies to adjusted net income, which is your taxable income less some reliefs. Pension contributions come off it, counted with any basic-rate tax relief your pension provider adds, and so do Gift Aid donations, counted with the tax the charity claims back. If they bring it back to £100,000 or below, you keep the whole Personal Allowance.
In the example above, paying the extra £10,000 into a pension through salary sacrifice would cost £3,800 of take-home pay, and the full £10,000 would go into the pension. The salary sacrifice calculator shows this for your own pay. Whether it suits you depends on when you need the money, and that is a decision for you or a regulated adviser.
Other limits near the same income
Adjusted net income also sets the High Income Child Benefit Charge, which starts at a lower income. The Child Benefit calculator shows how much of the benefit the charge takes back. Some childcare support also stops when one parent's adjusted net income goes over £100,000.
To see your own figures, use the take-home pay calculator, or look at £100,000 after tax for a full breakdown at the start of the trap. The tax code checker explains why your tax code gets smaller as the allowance goes.
Questions
Is the 60% rate an official tax band?
No. The official rate on this income is still the higher rate of 40%. The 60% is the effect of the higher rate and the loss of the Personal Allowance together.
Does a bonus count?
Yes. A bonus is taxable income, so it counts towards adjusted net income in the tax year you are paid it.
Where does the trap end?
At £125,140, where the allowance reaches zero. Income above that is taxed at the additional rate of 45%, or at the top rate of 48% in Scotland.
Official guidance
- Income Tax rates and Personal Allowances on GOV.UK
- Personal Allowances: adjusted net income on GOV.UK