How does the 60% effective marginal tax rate trap on income over GBP 100,000 work in the UK?

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The 60% Tax Trap -- How It Works The UK Personal Allowance (GBP 12,570 in 2026/27) is not available to everyone. Once your adjusted net income exceeds GBP 100,000, HMRC reduces your allowance by GBP 1 for every GBP 2 of income above that threshold. By the time income reaches GBP 125,140 (GBP 100,000 plus 2 x GBP 12,570), the entire Personal Allowance is eliminated. Why 60%? In this income band you are already a higher-rate taxpayer, so each extra GBP 1 of income is taxed at 40%. But the taper also removes GBP 0.50 of Personal Allowance for each GBP 1 earned. That GBP 0.50 of lost allowance is then taxed at 40%, adding another GBP 0.20 of tax. Combined: - 40p income tax on the pound earned - 20p income tax on the GBP 0.50 of allowance lost = 60p total tax on every GBP 1 earned between GBP 100,001 and GBP 125,140 This is also sometimes called the '60% trap' or the 'Personal Allowance trap'. A worked example Imagine your income rises from GBP 100,000 to GBP 101,000: - Extra GBP 1,000 taxed at 40%: GBP 400 tax - Personal Allowance reduced by GBP 500; GBP 500 of previously tax-free income now taxed at 40%: GBP 200 extra tax - Total extra tax: GBP 600 on GBP 1,000 = 60% effective marginal rate Above GBP 125,140 the PA is fully gone and the marginal rate drops back to 45% (additional rate). Strategies to reduce or escape the trap The most common and legitimate approach is to reduce your adjusted net income below GBP 100,000: 1. Pension contributions -- Additional pension contributions reduce adjusted net income pound-for-pound. Contributing enough to bring income under GBP 100,000 can save 60p in tax for every GBP 1 contributed (up to the Annual Allowance of GBP 60,000). 2. Gift Aid donations -- Extend your basic/higher-rate band and reduce adjusted net income. 3. Salary sacrifice -- Arrangements to exchange salary for employer pension contributions, childcare vouchers or cycle-to-work can reduce the gross income figure. 4. Timing income -- Where possible, deferring bonuses or other income into a different tax year to keep below GBP 100,000 in any single year. Who is affected Anyone with adjusted net income between GBP 100,001 and GBP 125,140 faces this trap. This increasingly includes senior employees, higher-earning professionals, and self-employed individuals as wages rise. Adjusted net income includes employment income, self-employment profits, rental income, savings and dividend income, reduced by reliefs such as pension contributions and Gift Aid. If you are in this band, specialist tax planning is almost always worth considering.

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