The 60% tax trap: what every higher earner needs to know

If you earn over £100,000, there is a very good chance you are paying more tax than you realise because of the 60% tax trap. The only thing HMRC loves more than a high earner is a high earner who does not know the rules.

Not because of a mistake, and not because of anything you have done wrong. It is simply how the UK tax system works at that level. It catches a remarkable number of people off guard.

The 60% tax trap is one of the least understood areas of the tax code. When savings interest is thrown into the mix, the impact can be even greater than most people expect.

Between £100,000 and £125,140: the 60% trap

Between £100,000 and £125,140 is where it gets interesting. Your personal allowance sits at £12,570, but once your income goes above £100,000, HMRC starts taking it back. For every £2 you earn over that threshold, you lose £1 of your allowance.

So you are paying 40% tax on what you earn, and on top of that, losing an allowance worth another 20% in tax at the same time. That is where the 60% effective rate comes from.

Above £125,140

At this level your personal allowance is gone entirely. From that point on, you simply pay 45% as an additional rate taxpayer.

Painful, but at least straightforward.  The 60% band is therefore a quirk of the taper rather than a real tax rate, and it only exists in that specific window.

The 60% tax trap in real life: meet Graham

Graham is 56 years old. He earns £120,000 a year through his company, is a member of his employer's pension scheme, and has £150,000 sitting in a savings account earning 3.5% interest per year. That interest alone adds £5,250 to his annual income.

Graham earns £120,000 in salary alone. This means he is already deep inside the 60% tax trap before his savings interest even arrives. The taper starts at £100,000. So every pound between that threshold and £125,140 is effectively taxed at 60%.

His savings interest of £5,250 sits entirely within that band. So all of it gets hit at 60%, resulting in a tax bill of around £3,150 on that interest alone, rather than the £1,050 he might have expected at the basic 20% rate.

Graham is already in a company pension scheme. Therefore, by increasing his pension contributions via salary sacrifice, he can bring his adjusted net income back below £100,000.

That could restore his full personal allowance and save him thousands of pounds per year. Additionally, it builds his retirement pot at the same time. A genuine win on both fronts.

Why savings interest can play a particularly troublesome role

Interest rates have risen in recent years. Consequently, savers who have happily left money in accounts for decades are now receiving, at last meaningful returns for the first time in a long time. However, for those earning above or near £100,000, that extra income is not necessarily the gift horse it appears to be.

Even a savings pot that some may consider modest can have a significant financial impact. This can result in you entering the personal allowance taper zone.

For example, someone earning £98,000 with £75,000 in savings at 3.5% would receive £2,625 in interest. 

That pushes their income to £100,625, at which point the taper begins. Suddenly, they are losing £1 of personal allowance for every £2 above the threshold.

Furthermore, many people simply do not realise this is happening and that they may already be caught by the 60% tax trap. HMRC collects the tax via self-assessment or through an adjusted tax code, and it can come as quite a shock at the end of the year.

Practical ways to escape the 60% tax trap

The aim is to get your adjusted net income below £100,000. There are several ways to do this.

Pension contributions are one way to help. This can be done through salary sacrifice via an employer scheme or direct contributions to a personal pension. Both methods reduce your adjusted net income pound for pound. Additionally, you receive tax relief at your marginal rate, making the effective cost surprisingly low.

Changes to salary sacrifice in the budget

It is worth noting, however, that the Autumn Budget 2025 introduced a notable change to salary sacrifice that affects how higher earners manage the 60% tax trap. From April 2029, HMRC will cap the national insurance relief on salary-sacrificed pension contributions at £2,000 per year.

Any contributions above that level will attract both employee and employer national insurance. So, while salary sacrifice remains a highly effective tool, higher earners who contribute substantial amounts will see some of their NI savings reduced. Importantly, income tax relief on pension contributions is entirely unaffected by this change, so the personal allowance protection benefit remains fully intact.

The sooner you act, the more you can take advantage of the current uncapped rules relating to national insurance.

Other ways to shelter your savings

ISAs shield your savings interest from tax entirely, and for anyone navigating the 60% tax trap, they are one of the most powerful tools available. Interest earned inside an ISA does not count towards your total income, so moving savings into an ISA wrapper can prevent future interest from causing problems. Equally, once money is in an ISA, it grows free of income tax and capital gains tax forever.

Gift Aid donations also reduce adjusted net income. Therefore, if you are a regular giver to charity, making those donations through Gift Aid has a double benefit.

You also get to extend your basic rate band, which can further reduce your overall tax.

Finally, reviewing the timing of income, bonuses, or dividends can sometimes allow you to avoid pushing over the threshold in a given tax year. Proper planning ahead of the tax year end is key.

The 60% tax trap problem is solvable with the right advice

The frustrating thing about this trap is that it catches people who have genuinely done everything right. They are successful, earned well, and saved sensibly.

Yet without proper tax planning, the system quietly takes a larger slice of their income. However, the solutions are fairly straightforward once you know where to look.

Pension planning can play a critical role as well as using your ISA allowances. By adjusting your net income, the difference can be substantial. Moreover, the sooner you act, the greater the long-term benefit.

If your income is near or above £100,000 and you have savings generating interest, it is well worth speaking to a regulated financial advisor. A proper review of your position could save you thousands of pounds, restore your personal allowance, and put you on a far stronger financial footing going forward.