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what is the 60% tax trap

What is the 60% Tax Trap and How Can You Legally Avoid It?

03/03/2025tax

What is the 60% tax trap? Is a most askable question to solve for resolving all financial crises? The 60% tax trap emerges as an unanticipated result of UK taxation, which impacts people earning between £100,000 and £125,140. The attribution of personal tax-free allowance diminishes steadily at a two-pound rate for every two-pound increase over the £100,000 threshold among this income bracket. The effective tax rate within this measurement band reaches 60% because it represents one of the highest marginal tax rates that exist in the United Kingdom. In this article, you find out the answer to what is the 60% tax trap is and how you can legally avoid it, along with other important information.

Talk to our best accountants and bookkeepers in the UK at CruseBurke. You will get instant help about 60% tax trap.

What is the 60% Tax Trap?

In the UK, people pay income taxes at three different rates based on their annual earnings, which range from 20% to 40% to 45%.

The tax burden for people within the £100,000 to £125,140 income bracket reaches 60% because their personal allowance is reduced. They call it stealth tax’. The unofficial 60% tax rate of income tax remains hidden in all HMRC guidelines since it operates as an unconventional effective income tax rate.

Stealth tax is the name given to a hidden tax system. The UK tax system does not explicitly indicate 60% income tax rates, but certain individuals reach that amount when their tax allowances reduce their tax rates. These points clearly justify how it happens:

  • The income tax exemption amount, known as personal allowance, begins to decrease when your earnings surpass £100,000.
  • Your personal allowance wipes out for each £2 that your income exceeds £100,000.
  • Your taxable income reaches 60% between £100,000 and £125,140 since you must pay 40% tax and lose parts of your tax-free allowance.
  • A combination of the tax allowance reduction with a tax rate of 40% creates a combined tax rate of 60% within this income range.

Big bonuses typically deliver unexpected tax expenses to professionals who encounter this situation.

Why Does the 60% Tax Trap Happen?

The personal allowance of £12,570 starts to decrease gradually as your yearly income reaches or surpasses £100,000. The personal allowance represents the yearly free income threshold from which the government withholds income tax. Taxpayers experience income tax limitation at a rate of £1 per £2 earned over the £100,000 threshold.

Your income tax deductions amount to £40 for every £100 between £100,000 and £125,140 in addition to the lost personal allowance tax rate of £20. Employed people pay employee national insurance that adds 2 percent tax to their total income. The combination of income taxes and national insurance totals a 60% rate. Those who earn £125,140 and more will completely lose their personal allowance entitlement. Experiencing this type of tax treatment seems to constitute double punishment.

How Can You Legally Avoid the 60% Tax Trap?

Following are some appropriate and legal ways to reduce taxable income and avoid the 60% tax trap:

  1. Increase Pension Contributions

The most effective method to evade the 60% tax deduction is through pension scheme contributions that diminish taxable income. The policy would either recover lost personal allowances or decrease incomes below the £100,000 threshold. Pension contributions both grow larger because of compound interest, which enhances future financial security.

  1. Make Charitable Donations

Registers charities who use Gift Aid enable donors to reduce their taxable income. Maintaining the personal allowance becomes possible if donations lead income to drop below £100,000.

  1. Use Salary Sacrifice Schemes

Employees accept reduced wages from their salary to receive alternative non-cash benefits. The non-cash benefits that employers provide include childcare vouchers, cycle-to-work schemes, as well as private health insurance coverage. Such arrangements effectively reduce taxable income levels while allowing employees to access company advantages.

How Does Using Previous Years’ Pension Allowances Work?

Taxpayers enjoy the carry-forward scheme for pension allowance purposes, which allows them to utilise past unused allowances from the most recent three tax years together with their present year’s allowance. You can benefit from years of unused pension contribution limits through carryforward so that you lower your taxable income with larger payments.

How Can This Help Reduce Tax?

The carry-forward scheme allows people earning £200,000 to minimise their taxable salary until it reaches £100,000. These measures would enable them to collect their entire personal allowance of £12,570 while staying outside the tax rates of both 60% and 45% and preserving their childcare benefits. They contribute £80,000 to their pension. The NSS provides basic-tier tax relief, which makes the total pension amount worth £100,000 when an individual contributes pension funds to a non-workplace arrangement. The individuals declare their £100,000 pension contribution when filing tax returns. The total pension contribution consists of £60,000 for the current year and a previous year submission amount, such as £40,000 from 2021-22.

The employee must exhaust their pension allowance starting from the oldest time frame first (they need to exhaust the entire £40,000 from 2021-22 before utilising subsequent annual allowances).

What About High Earners?

A pension allowance reduction will begin when your yearly income reaches £260,000 and continues by decreasing £5,000 per extra £1 you earn above that threshold. Each year, individuals with £360,000 income receive the minimum pension allowance of £10,000. The ‘tapered’ annual allowance acts as a restriction that decreases pension tax relief benefits for high-income earners.

What are the Benefits of Increasing Your Pension Contributions?

The combination of increased pension payments reduces income taxes while building up greater long-term savings value. Pension tax benefits provide reduced financial consequences on contributions because legislators subsidise these payments. You can make pension contributions that are the lower value of £60,000 or 100% of your yearly earnings. People earning more than £200,000 experience their pension annual allowance limit getting tapered down to potentially reach £10,000.

Conclusion

High earners face substantial income reductions from the 60% tax trap because tax deductions exceed anticipated amounts. So, it is vital to know the concept of the 60% tax trap. People who take advantage of legal tax-saving methods such as contributing more to their pension plans or donating to charities, can recover their whole personal allowance, thus reducing their actual tax burden. Learning about the taxation rules and establishing advanced financial measures allows citizens to maintain a higher income and build financial security over time.

Reach out to our intelligent and clever-minded guys to get the answer to your queries in the UK, we will get to your answers quickly. We will help to decide how to deal with your tax implications.

Disclaimer: The information about the 60% tax trap burden provided in this blog includes text and graphics of a general nature. It does not intend to disregard any of professional advice.

  

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