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Although the highest Income Tax band is 45%, earnings between £100,000 and £125,140 a year are effectively taxed at a rate of 60% – known as the “60% tax trap”.
New research by interactive investor has revealed that the number of pensioners paying this rate of tax has more than doubled in three years. HMRC figures show that in the 2024/25 tax year, 77,000 pensioners aged 66 and over were caught in the 60% tax trap, up from just 34,000 in 2021/22.
Moreover, as the full new State Pension is set to rise by 4.8% in April 2026 and Income Tax thresholds have been frozen until 2031, many more pensioners who are still earning could soon face a 60% tax bill.
Keep reading to learn more about the 60% tax trap and find out four ways you can avoid it if you’re a high earner.
If you earn more than £100,000 a year, you could face an effective 60% tax rate
The amount of Income Tax you pay depends on how much you earn in a tax year. If you earn between £50,270 and £125,140, you’ll likely pay the higher rate of Income Tax, which is 40% in 2025/26.
The 60% tax rate might arise because your tax-free Personal Allowance of £12,570 (2025/26) gradually reduces once your income exceeds £100,000 – it tapers at a rate of £1 for every £2 you earn over the threshold.
As such, your Personal Allowance is entirely lost if you earn more than £125,140. This means that you’ll pay an effective Income Tax rate of 60% for earnings between £100,000 and £125,140.
Here’s an example to show how the 60% tax rate might apply in practice:
- You earn £120,000, exceeding the threshold by £20,000.
- The £20,000 is taxed at your marginal rate of 40%, which equates to £8,000.
- Your Personal Allowance will fall by £10,000, and this amount becomes taxable at 40% (£4,000).
This means that you pay 60% tax on the £20,000 you earned over the £100,000 threshold, which amounts to £12,000.
If your income reaches £125,140, you will not be entitled to any Personal Allowance and will have to pay the additional-rate tax of 45%.
You might be at risk of falling into the 60% tax trap even if you’ve stopped working
It’s important to note that your total income counts towards the £100,000 threshold – not just earnings from employment.
As such, you could still be at risk of falling into the 60% tax trap if you’ve already retired.
HMRC uses your “adjusted net income” to determine your tax rate. This is your total taxable earnings before any Personal Allowances and less certain tax reliefs, such as donations made to charity through Gift Aid.
Your adjusted net income includes:
- Most pensions, including the State Pension
- Interest on savings and pensioner bonds
- Money you earn from employment
- Dividends from company shares
- Profits from self-employment
- Some state benefits
- Some rental income
- Income from a trust
- Global income.
4 clever ways you could reduce your taxable income and avoid the 60% tax trap
Whatever stage of life you’re in, here are four practical strategies for avoiding the 60% tax trap.
1. Consider boosting your pension contributions
Pension contributions are usually deducted before tax. So, if you’re still employed, boosting your workplace pension contributions could help you keep your taxable income below the £100,000 threshold.
Salary sacrifice can be a useful way to reduce your pre-tax income and bolster your pension savings. However, in her 2025 Autumn Budget, the chancellor announced that contributions made via such schemes will be capped at £2,000 for National Insurance (NI) relief from 6 April 2029; anything above this will be subject to NI.
Also, be aware that if you start drawing flexibly from your pension, you might trigger the Money Purchase Annual Allowance (MPAA). This lowers the maximum amount you can contribute tax-efficiently to your pensions each tax year to £10,000 (2025/26).
2. Donate money to charity through Gift Aid
If you’re a higher- or additional-rate taxpayer in England, Wales, or Northern Ireland, you can claim 20% or 25% tax relief respectively on charitable donations made through Gift Aid. You can do this through your self-assessment tax return or by contacting HMRC to change your tax code.
Giving through Gift Aid also allows your chosen charity to claim back 25p from HMRC for every £1 you donate. For example, if you donate £100, the charity will receive £125.
To claim Gift Aid, you must be a UK taxpayer who has paid sufficient tax to cover the amount the charity will reclaim on your donations in that tax year.
3. Control pension withdrawals carefully
You can usually take up to 25% of your private and workplace pensions when you reach 55 (rising to 57 from 2028), provided this does not exceed £268,275 (2025/26).
However, it’s essential to seek advice before taking such a lump sum, to ensure this is suitable for your circumstances. Indeed, it might be wise to take only what you need, rather than the maximum available, especially if you’re approaching the £100,000 threshold.
You can then use the remaining portion of your tax-free lump sum to fund spending during high-income years. This could help to reduce your taxable income and protect your Personal Allowance.
4. Plan your finances as a couple
Planning jointly as a couple can be a powerful strategy for managing your household wealth as tax-efficiently as possible.
For example, transferring some income-generating assets – such as rental properties and shares – to a spouse or civil partner in a lower tax band could keep your income below the £100,000 threshold.
Likewise, saving and investing together could ensure you make full use of individual allowances, such as ISA and Dividend Allowances. You might also want to top up your spouse or partner’s pension if they aren’t working or can’t afford to use their full Annual Allowance (the maximum amount you can save tax-efficiently into your pensions in a single tax year).
Get in touch
If you’re concerned about falling into the 60% tax trap and would like some help reviewing your finances and planning how to keep them as tax-efficient as possible, we can help.
To learn more, please email hello@sovereign-ifa.co.uk or call us on 01454 416653.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pensions Regulator.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Approved by Best Practice IFA Group Ltd on 23/12/15