Scott Kingsley, Senior Wealth Advisor
When most people think about tax, they focus on the headline rates: 20%, 40% and 45%.
What people often overlook is the effective tax rate - the actual rate you end up paying on each extra pound you earn, once all the oddities in the system are taken into account.
One of the most surprising (and costly) examples kicks in when your income crosses the £100,000 threshold.
From that point up to £125,140, every extra pound you earn doesn’t just attract the standard higher-rate tax. It also triggers a reduction in your tax-free personal allowance. This double hit means your effective marginal rate becomes a staggering 60%.
It’s not a typo, and it’s not a trick, but it is avoidable with a bit of smart planning.
Here’s how it works.
Everyone in the UK is entitled to a personal allowance, currently £12,570, which is the portion of income you can earn before income tax kicks in. But once your total income exceeds £100,000, that allowance starts to shrink. Specifically, it reduces by £1 for every £2 you earn over the £100,000 mark.
By the time you hit £125,140, your entire personal allowance is gone.
Let’s put this into numbers. Suppose you earn £100,000. Now, add a £1,000 bonus. Because you’re over the £100,000 line, you lose £500 of your tax-free personal allowance. That means not only is the bonus taxed at 40%, but another £500 that was previously tax-free is now also taxed at 40%. So you pay 40% on £1,500, or £600 in tax, on just £1,000 of extra income, which is an effective tax rate of 60%.
Scotland adds another twist. Due to different income tax bands, Scottish taxpayers may face steeper effective rates once the personal allowance starts to erode, though the calculation differs from the rest of the UK. And when you include National Insurance contributions, the deductions can climb even higher.
For the most current figures across all UK regions, you can refer to HMRC’s Income Tax rates and Personal Allowances.
And here’s the biggest benefit: these thresholds are currently frozen until at least 2028. That means you don’t have to get a promotion or bonus to enter this high-tax zone. Inflation alone could nudge more earners into the 60% band each year, a phenomenon known as fiscal drag. It’s one more reason why forward planning isn’t just smart, it’s essential, particularly for professionals whose income spans multiple jurisdictions or fluctuates with exchange rates.
What makes this so problematic is that most people don’t even realise it’s happening. Your payslip doesn’t flash a warning. Your bonus doesn’t arrive with a caveat. Unless you run the numbers or get a nasty surprise at the end of the tax year, you may never know you’ve crossed into this financial no-man’s-land.
The effects of the 60% band go beyond tax frustration. It can quietly chip away at other benefits and financial planning opportunities.
First, there's childcare. In England, households with an income above £100,000 lose access to 30 hours of free childcare a week for children aged 3–4. That’s a substantial hit, worth thousands annually, which vanishes the moment your income nudges over the line, even temporarily.
Then there’s the question of mortgage affordability. If you’re applying for a home loan and suddenly lose a chunk of your disposable income due to surprise tax liabilities, your borrowing power can shrink. Lenders don’t always account for the quirks of the 60% band, but the resulting monthly squeeze is very real.
And let’s not forget workplace benefits. Some company schemes, bonuses, or share options push employees just over the £100,000 mark, sometimes without them even knowing. By the time your April tax return rolls around, you’re left scrambling to explain an unexpected liability to HMRC.
In short, it’s not just about numbers on paper. The hidden 60% rate has real-world implications, particularly for families and professionals who are trying to balance growing earnings with rising living costs.
The good news is that there are ways to fight back. Most of them are entirely legal, sensible, and actually encouraged by the tax code itself.
This is the most straightforward and most powerful strategy.
By contributing to a pension, you reduce your adjusted net income. That’s your total taxable income after deducting pension contributions, Gift Aid donations, and certain other reliefs. This is the figure HMRC uses to calculate whether your personal allowance is reduced or eliminated. For example, say you’re on £110,000 and want to bring yourself under the £100,000 threshold to restore your full personal allowance. You don’t need to sacrifice the full £10,000 of income. Thanks to tax relief, an £8,000 contribution (topped up by £2,000 from HMRC at basic rate) is all it takes to reduce your taxable income by £10,000.
What’s more, carry forward rules allow you to use unused pension allowances from the previous three tax years, provided you’ve been a member of a registered pension scheme during that time. So if you haven’t maxed out your contributions in previous years, you may be able to make a larger lump-sum payment now and wipe out the 60% rate altogether.
Keep in mind that there is a tapered annual allowance for very high earners (those with incomes above £260,000), which can reduce your pension allowance to as low as £10,000 per year. It’s a complex area, but worth discussing with a financial adviser if you're anywhere near those thresholds.
Donations to registered charities via Gift Aid also reduce your adjusted net income. A £1,000 Gift Aid donation is treated as £1,250 gross by HMRC, and you may be able to claim back higher-rate relief on your tax return.
This won’t suit every taxpayer, but if charitable giving is already part of your plan, using it strategically can bring real tax benefits.
Some employers offer salary sacrifice schemes for pensions, childcare, cycle-to-work, or even electric cars. These reduce your gross pay and, consequently, your adjusted net income.
It’s worth checking what your employer offers, particularly if you’re close to the £100,000 line and can sacrifice just enough salary to slip below the threshold without actually giving up that value in benefits.
Timing is everything.
To take advantage of pension contributions and bring your income below £100,000 for the current tax year, you must act before 5 April. Contributions made after that date will count towards the next tax year and won’t help with your current tax calculation.
That’s why it’s wise to review your earnings and potential bonuses well before the end of the financial year. It gives you time to make contributions, notify payroll where necessary, and gather documentation for your self-assessment return.
If you’re using carry forward allowances, it’s especially important to double-check:
A short meeting with a financial adviser in February or March could save you thousands come April.
The UK’s hidden 60% tax band is, quite frankly, one of the more confusing elements of an already intricate tax system. But once you understand how it works, you can take control.
Whether it’s topping up your pension, giving to charity, or restructuring your income with help from your employer, the tools to avoid this trap are available and perfectly above board.
The key is not to wait. The closer we get to the end of the tax year, the fewer options you’ll have. For high earners, the difference between acting in time and missing the deadline could be thousands of pounds in unnecessary tax, and in some cases, missed childcare support or pension growth.
So, take a look at your income. Run the numbers. And if you’re unsure, ask for help. Avoiding the 60% band isn’t about gaming the system. It’s about understanding the rules and making them work in your favour.
Because at the end of the day, your income should work for you, not just for the taxman. Get in touch if you need a professional touch on your finances.