06 Jan 2025
If you earn between £100,000 and £125,140 a year, you might be caught in what’s known as the 60% tax trap. This is a quirk in the UK tax system that can significantly reduce the value of your earnings. Here’s how it works and, most importantly, what you can do to mitigate it.
What is the 60% Tax Trap?
The UK personal allowance (the tax-free income you can earn) is currently £12,570. However, for every £1 you earn above £100,000, you lose 50p of that allowance. By the time your income reaches £125,140, the personal allowance is completely withdrawn.
This creates an effective tax rate of 60% on earnings between £100,000 and £125,140 because you’re taxed at the higher rate of 40%, and you lose some of your tax-free allowance.
For example:
- Earn £100,000? You keep your full allowance.
- Earn £110,000? You lose £5,000 of your allowance, meaning an extra £2,000 in tax on top of the usual higher-rate tax.
How Can You Mitigate the 60% Tax Trap?
Thankfully, there are strategies to reduce your taxable income and avoid the trap:
- Pension Contributions
Making contributions to your pension reduces your taxable income. For example, if you earn £105,000 and sacrifice £5,000 gross from your salary which is then paid into your pension by your employer, your taxable income drops to £100,000, preserving your full personal allowance and reducing your tax liability. This only applies if your employer operates Salary Exchange. - Charitable Donations
Donations made via Gift Aid reduce your taxable income. This means supporting a cause you care about can also help you stay below the tax threshold. - Salary Sacrifice Schemes
Opting for salary sacrifice on benefits like childcare vouchers, electric car schemes, or additional pension contributions (see point 1) can lower your taxable income and help you avoid the 60% rate.
Why It Matters
Being aware of the 60% tax trap helps you take control of your finances. By strategically managing your income, you can avoid paying unnecessary tax and put your hard-earned money to better use, such as growing your pension or supporting charitable causes.
If you think you’re affected, feel free to contact Wingate Benefit Solutions on 01883 332260 or at info@wingatebs.com about the best ways to reduce your taxable income. Planning ahead could save you thousands!
Please note this document is for information purposes only and does not constitute advice, and that tax and legislation are subject to change.
