What is the 60% tax trap and how can you legally avoid it?
This article explores what the 60% tax trap is, how it works and ways you can legally reduce your tax bill.
Most people in England, Wales and Northern Ireland pay tax at the standard rates of 20%, 40% or 45% (or no tax), depending on income. However, some end up paying 60%.
Before we discuss this further, it’s worth flagging that Scotland has different tax bands.
The 60% tax rate isn’t an official tax band, but if you’re a higher-rate taxpayer, you may pay this eye-watering rate on your earnings.
This article explores what the 60% tax trap is, how it works and ways you can legally reduce your tax bill.
Summary
- If you earn between £100,000 and £125,140, you could pay 60% tax due to a tapered personal allowance. This means every £100 you earn is reduced to £40.
- There are a few ways to avoid the 60% tax trap, but you must be proactive.
- Unbiased can help you navigate your tax liabilities by connecting you to a financial adviser regulated by the Financial Conduct Authority (FCA).
What is the 60% tax trap, and how does it work?
If you’re a higher-rate taxpayer, defined as those earning between £50,271 and £125,140 annually, you may be hit by a stealthy 60% tax bill.
This is because your personal allowance, which is £12,570 for the 2024/25 tax year, begins to fall when you earn over £100,000.
Essentially, your personal allowance is reduced by £1 for every £2 you earn over £100,000. Once you earn £125,140 or more, your allowance disappears entirely.
Due to the tapering of your personal allowance, every £100 you earn between £100,000 and £125,140 is reduced to £40, as you lose an additional £20 via the reduced allowance.
You can view the current 2024/25 tax bands below.
| Tax band | Taxable income | Tax rate |
|---|---|---|
| Personal allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
Can I legally avoid the 60% tax trap?
One of the best ways to avoid 60% tax is to pay into a pension or increase your payments if you’re already contributing.
By paying more into a pension, you reduce your adjusted net income and can either reduce the amount of personal allowance you lose or even reinstate it fully if your income falls to £100,000 or less.
Alternatively, you could donate to charity to cut your income to under £100,000 and get tax relief.
Another option is to use salary sacrifice to give up part of your salary for a non-cash benefit such as childcare vouchers or private medical insurance.
Why is boosting pension contributions worth considering?
The first option of contributing to your pension is attractive, as you’re building your pot for later on in life while also benefitting from tax relief.
Depending on how your pension fund performs, you can also benefit from potentially higher returns and compound interest over a long time, where your interest earns interest.
However, you should be aware that there are limits to how much you can contribute to your pension each year and get tax relief.
You can contribute the lower of £60,000 or 100% of your earnings annually and receive tax relief – if you exceed this, you’ll incur a tax charge.
High earners with an income of £200,000 will likely have a tapered pension annual allowance, which can reduce it to as little as £10,000.
Seek expert financial advice
Navigating the complexities of pension tax can be overwhelming, and the consequences of getting it wrong are significant. This is where expert financial advice becomes invaluable.
A qualified adviser can help you understand your options, avoid costly tax traps like the 60% tax charge, and make the most of your retirement savings.
Whether you need guidance on tax-efficient withdrawals or long-term planning, professional advice ensures you make informed decisions tailored to your individual needs and goals.
Unbiased can quickly connect you to an expert financial adviser or accountant.
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