At first glance, the UK’s income tax rates seem straightforward, comprising the basic, higher and additional rate bands (currently 20%, 40% and 45% in England, Wales and Northern Ireland). However, calculations show that there exists an often-overlooked quirk in the tax system that can push high earners into an effective marginal income tax rate of 60%. In 2023/24, approximately 634,000 taxpayers fell into the 60% band, with estimates that this will possibly reach over a million by 2027/28.

The reason for this is that when taxpayers earn between £100,000 and £125,140, they lose part or all of their personal allowance. For the 2025/26 tax year, the allowance remains at £12,570; however, the allowance is withdrawn at a rate of £1 for every £2 earned where adjusted net income (ANI) exceeds £100,000. Where ANI is £125,140 or above, the allowance is zero, resulting in an effective 60% marginal rate on the slice between £100,000 and £125,140 (40% higher-rate income tax plus 20% lost allowance).

Example:

Income increases from £100,000 to £101,000

At an income of £100,000, the taxpayer is still entitled to the full personal allowance and is taxed at 40% on the amount exceeding £50,270 (the basic rate limit). Subsequently, for every £2 of income above £100,000, £1 of the personal allowance is withdrawn. Therefore, an extra £1,000 of income reduces the personal allowance by £500.

This creates two layers of tax on that £1,000:

1.  40% income tax on the extra £1,000

£1,000 × 40% = £400

2. 40% income tax on the additional £500 that has become taxable (because the personal allowance has been reduced)

£500 × 40%= £200

Total income tax on the £1,000 increase:

£400 + £200 = £600

Effective marginal tax rate:

600/1000 = 60%

How to avoid the ‘trap’

There are two methods whereby this 60% ‘trap’ can be mitigated. While neither approach will yield immediate net gains, they ensure that any additional income is put to better use rather than wasted on tax payments.

1. Pension contributions

Pension contributions can play a crucial role in mitigating the 60% ‘trap’. The reduction in personal allowance is based on the taxpayer’s ANI. If this amount can be reduced to below £100,000, the full personal allowance is restored. Contributions to a pension scheme (whether made under a relief-at-source arrangement or through an occupational scheme operating a net pay arrangement) reduce the ANI by the gross amount contributed. This effectively means that every £1 contributed to a pension scheme saves 60p in tax.

2. Salary sacrifice

Salary sacrifice arrangements can be even more efficient in eliminating or at least reducing the ‘trap’. Under a salary sacrifice arrangement, the employee forgoes part of their cash salary in exchange for a tax and NIC-free benefit (usually a pension contribution but can also be for other benefits). Since the sacrificed salary is never received, it does not form part of taxable income, nor is it taken into account in the ANI. The employee saves on tax and NIC for the salary forgone, and the employer saves the employer’s NIC. Salary sacrifice therefore reduces exposure to the 60% marginal rate at source and also produces an NIC saving – the employee typically saves 2% in employee NICs, while the employer saves 15% in employer NICs.

Note: at the time of writing, the Autumn Budget 2025 has not taken place, although rumours abound that Ms Reeves will place a £2,000 ‘cap’ on the amount of salary that can be sacrificed into a pension scheme without incurring NIC on that portion. Above this cap, the usual NICs would apply.

Practical point

Many items can be salary sacrificed, the most common being under a cycle-to-work scheme or pension contributions, but it can also apply to the leasing of an electric car.

The benefit-in-kind tax on fully electric cars is much lower than the cost of leasing privately (despite the possible pay per mile tax being considered by the Chancellor). The cost of the lease reduces the ANI so income tax and NIC are not chargeable on that amount. If the gross amount of salary is brought below £100,000, the full personal allowance can be retained.

Need professional accounting service or tax advice? Contact us to book a 15-min Free Consultation with us today.

To find out more please follow us on Facebook, Instagram, or LinkedIn. Feel free to contact us on 0333 006 4847 or request a call back by texting 075 6464 7474