60% Income Tax Trap: How It Works and How to Avoid It

The 60% Income Tax trap is the effective 60% marginal tax rate that applies when your adjusted net income is between £100,000 and £125,140. 

It happens because your Personal Allowance is gradually withdrawn once your adjusted net income exceeds £100,000, so you're taxed on more of your income at the same time as paying the higher rate.

If you're employed, self employed, or a company director, understanding how this rule works can help you keep more of what you earn. Here’s everything you need to know.

Key points

• Your adjusted net income is what pushes you into the 60% tax trap📊
  It's not just your salary that counts. Rental income, dividends, savings interest, self employed profits, and other taxable income can all push you into the 60% tax trap.
• Planning ahead can reduce your tax bill 📅
  Making pension contributions and Gift Aid donations, and changing how you take business income can help lower your adjusted net income. These decisions usually need to be made before 5 April.
• Higher earnings don't always mean much higher take-home pay ⚠️
  A pay rise, bonus, or particularly profitable year can trigger the 60% tax trap, leaving you with less of your extra income than you might expect.
• ANNA helps you stay ahead of tax all year round 🚀
  ANNA estimates your tax bill in real time with built-in bookkeeping, Self Assessment support, invoicing, and a business account. It enables you to stay organised and make informed tax decisions before the end of the tax year.

How the 60% Income Tax trap works

For the 2026/27 tax year, the standard Personal Allowance is £12,570. Once your adjusted net income exceeds £100,000, your allowance is reduced by £1 for every £2 of additional income. When you reach £125,140, your allowance is used up.

Because you're already paying the higher rate of Income Tax on this income, losing part of your tax-free allowance has a double effect: You pay 40% tax on the extra income itself, and then pay 40% again on the allowance you just lost. 

Combined, that works out to an effective marginal tax rate of 60% between £100,000 and £125,140.

The 60% tax trap isn’t its own tax band; it's the 40% higher rate plus the extra tax from losing your Personal Allowance.

Here's a look at the current Income Tax bands:

These figures will remain frozen until April 2028.

How does the calculation work?

Imagine your adjusted net income increases from £100,000 to £101,000.

Normally, that extra £1,000 would just be taxed at 40% for a tax bill of £400.

But above £100,000, your Personal Allowance also starts shrinking. So that extra £1,000 costs you £500 of your allowance, too. That £500 was tax-free before, but now it isn't, so it's taxed at 40%, adding another £200.

This comes out as:

• £400 tax on the £1,000 you earned
• £200 tax on the £500 of allowance you lost
• £600 total tax on £1,000 of extra income, for an effective rate of 60%

This only applies between £100,000 and £125,140. Once your entire allowance is gone, your rate drops back to the normal 40% or 45%. 

🧠 Good to know

The 60% figure only relates to Income Tax. Depending on your circumstances, National Insurance contributions may also apply, further reducing your take-home pay.

What is adjusted net income?

Many people assume the £100,000 threshold is based only on their salary. In reality, HMRC uses a figure called adjusted net income, which can be higher or lower than your annual pay.

Adjusted net income includes most taxable sources of income, including:

• Employment income
• Self employed profits
• Rental income
• Dividend income
• Savings interest above available allowances
• Certain taxable benefits

If you receive income from several different sources, they'll all be taken into account when working out whether your Personal Allowance starts to reduce.

💡 Did you know?

ANNA’s Auto Accountant estimates your tax bill as your income changes. You can see how close you are to key tax thresholds while there's still time to act, rather than finding out when you file your return. 

Who is most likely to be affected?

The 60% tax trap often catches people who weren't expecting to become higher earners.

Here are the most common situations:

• Getting a promotion: If your adjusted net income exceeds £100,000, the increase in your take-home pay may be much smaller than expected
• Receiving an annual bonus: Even if your regular salary is below the threshold, a one-off bonus can push your adjusted net income into the affected range
• Having a particularly profitable year while self employed: Business profits can vary significantly from one year to the next, meaning a strong year can unexpectedly trigger the tax trap
• Taking income as a company director: The way you draw salary and dividends can affect your adjusted net income, making tax planning increasingly important as your earnings rise
• Earning income from multiple sources: Rental income, dividends, savings interest, and employment income all contribute towards your adjusted net income, so it’s easy to exceed the threshold without realising it

How to beat the 60% tax trap

Although you can't opt out of the Personal Allowance taper, there are legitimate ways to reduce its impact. The key is to review your position before the tax year ends, while you still have options.

Here’s what you need to do:

Step 1: Estimate your adjusted net income

Before making any decisions, estimate whether your adjusted net income is likely to exceed £100,000 this tax year. Take all relevant income sources into account. 

If you're close to the threshold, consider whether you can reduce your adjusted net income, for example by making pension contributions or Gift Aid donations, before the end of the tax year. 

Step 2: Increase your pension contributions

For many people, increasing pension contributions is the simplest way to reduce adjusted net income.

Eligible pension contributions reduce the figure HMRC uses when calculating whether your Personal Allowance should be withdrawn. This means a contribution could restore some or all of your allowance, reducing the amount of Income Tax you pay.

For example, if your adjusted net income is £105,000, making a qualifying pension contribution may reduce it back towards £100,000. As a result, you may recover some of your Personal Allowance while also increasing your retirement savings.

If you're a higher or additional rate taxpayer, you might also be entitled to extra pension tax relief beyond what's automatically applied.

Step 3: Claim Gift Aid tax relief

If you donate to charity through Gift Aid, claiming the available tax relief can reduce your adjusted net income and help preserve more of your Personal Allowance. 

If you're already making Gift Aid donations, make sure you've claimed all the relief you're entitled to.

Step 4: Review how you take business income

If you operate through a limited company, you may have flexibility over how and when you receive income.

For example, if you’re a director, it helps to review the balance between your salary and dividends, or consider whether you can take income in a different tax year. 

The right approach depends on your circumstances, and the rules are complex, so it’s a good idea to seek professional advice before making changes.

Step 5: Plan before 5 April

Many people only discover they've entered the 60% tax trap when preparing their Self Assessment tax return. By then, most opportunities to reduce adjusted net income have already passed.

Reviewing your expected income before 5 April gives you time to consider pension contributions, Gift Aid donations, or other legitimate planning options before the tax year closes.

How ANNA can help you avoid the 60% Income Tax trap

Managing your income around the £100,000 threshold takes more than just watching your payslip. You need visibility across every income stream, a clear read on your tax position, and the confidence to act before the tax year closes.

Here’s how ANNA helps you stay on top of your tax:

• Auto Accountant: Estimates your tax bill in real time, helping you spot potential tax issues before the end of the tax year
• Business account: Keeps your business income and spending in one place, so it’s easier to stay organised throughout the year
• Bookkeeping automation: Automatically categorises transactions and keeps accurate records, reducing admin and helping you prepare for tax season
• Self Assessment support: Prepares and files both traditional Self Assessment and Making Tax Digital for Income Tax with everything you need in one place
• Unlimited invoicing: Lets you create professional invoices, track payments, and stay on top of your cash flow as your business grows
• 24/7 customer support: Gives you access to real people who will help you with any tax-related questions

Get started with ANNA and take control of your tax today.