Earning Over £100,000? Here’s Some Ideas on how to Avoid the 60% Tax Trap

If you’re earning over £100,000, there’s a good chance you’re paying more tax on that income than you realise, and in many cases, far more than you need to. One of the most common issues we see with clients at this level is something known as the “60% tax trap”, and it catches people off guard every year.

Let’s break down what’s actually going on and how smart planning can help you keep more of what you earn.

Why the “60% tax trap” happens

Once your adjusted net income goes above £100,000, your personal allowance, that’s the £12,570 you can normally earn tax-free, starts to taper away. For every £2 you earn above £100,000, you lose £1 of this allowance.

By the time your income reaches £125,140, you’ve lost it completely. The result is that the slice of income between £100,000 and £125,140 is hit twice: you’re paying higher-rate tax and losing tax-free allowance, which means the effective tax rate in this band is roughly 60%.

Here’s a quick example:

You earn £100,000 and receive a £1,000 bonus.

£400 goes in higher-rate income tax.

You also lose £500 of personal allowance because of the taper, and that £500 is taxed at 40% — another £200.

Total tax: £600 on £1,000 of income (effectively 60% tax).

That’s how people end up losing 60p of every £1 in that band, and why planning matters.

What you can do about it

The good news is that there are several effective ways to reduce the impact of this tax trap. Most involve adjusting how and where your income is received so that you either bring your taxable income back below £100,000 or offset it in a tax-efficient way.

1. Make pension contributions

This is usually the most powerful option. By contributing to a pension, you reduce your taxable income while also benefiting from tax relief.

For example, if your income is £125,140, a gross pension contribution of £25,140 (including basic-rate relief) could bring your taxable income back down to £100,000. That means you reclaim your full personal allowance and reduce the effective tax rate on that income significantly.

Be mindful of the annual allowance (£60,000 for most people in 2025/26) and how tapering works if your income exceeds £260,000.

2. Use Gift Aid donations

Gift Aid can also reduce your taxable income. Donations extend your basic-rate band, meaning more of your income is taxed at 20% instead of 40%. Even relatively modest donations can make a noticeable difference if you’re close to the £100,000 threshold.

3. Consider salary sacrifice

If your employer offers salary sacrifice for pensions, electric vehicles, or other benefits, it’s worth exploring. Reducing your contractual salary not only lowers your income tax but can also bring you below the tapering threshold altogether.

4. Build tax-efficient savings

ISAs don’t directly reduce your taxable income, but they’re still a vital part of long-term planning. Growth and income inside an ISA are free from further income tax or capital gains tax, so shifting investments here can help manage future liabilities.

Why planning early matters

This isn’t something to think about only when you submit your tax return. Strategic decisions made before the tax year ends (5 April) can significantly affect your overall tax position. We often see clients who could have saved thousands of pounds if they’d planned ahead rather than reacting after the year is over.

If you’re expecting a pay rise, bonus, or dividend that pushes you above £100,000, now is the time to review your position. Even small adjustments, a pension top-up here, a charitable donation there, can make a big difference.

AELs advice

The 60% tax trap isn’t something to fear, but it’s definitely something to plan around. With the right strategy, you can reduce the drag of unnecessary tax, reclaim your personal allowance, and put more of your income to work for you, whether that’s building retirement savings, investing, or simply improving cash flow.

If your income is approaching or already over £100,000, we strongly recommend a tax review before the end of the tax year. We’ll look at your full financial picture, calculate the most efficient strategies, and help you put a plan in place so you’re not giving more to HMRC than you need to.

Get in touch with our team to discuss how we can help you navigate the £100k tax trap and keep more of your hard-earned income working for you.