UK tax explained: the 60% trap and how to save tax

What is the £100,000 tax trap?

Once your income passes £100,000, your tax-free Personal Allowance of £12,570 is withdrawn at £1 for every £2 you earn above it. It disappears completely once you reach £125,140.

Losing that allowance means that, on top of the 40% higher rate you already pay, another slice of your income becomes taxable too. Between £100,000 and £125,140 your marginal rate, meaning the tax on your next £1, rises above 60%, and reaches about 62% once National Insurance is added. It is the highest tax band most employees will ever face, and it is easy to miss because no tax table lists a “60% rate”.

This is the trap the calculator is built to show. Bringing your income back under £100,000, usually with a pension contribution or a Gift Aid donation, restores the lost allowance. That can be worth far more than the amount you put in.

Effective rate versus marginal rate: what is the difference?

Your effective rate is the share of your whole income that goes in tax and National Insurance. It is a useful headline number. Your marginal rate is what you pay on your next £1 of income.

The two can be very different, and it is the marginal rate that matters for decisions. Someone earning £110,000 might have an effective rate of roughly a third but a marginal rate of 62%. Every extra £100 of salary then adds only about £38 to their take-home, while £100 put into a pension can save far more than £38 in tax.

How to save tax legally in the UK

You cannot change the tax rates, but you can change how much of your income is exposed to them. Here are the main levers for a UK employee, all of them modelled by the calculator.

Pension contributions reduce the income that is taxed. In the £100,000 to £125,140 trap they are especially powerful, because they can restore your Personal Allowance as well as save tax at your marginal rate.

Salary sacrifice means giving up salary for a pension or a benefit such as an electric car. It also saves National Insurance, which an ordinary pension contribution does not.

Sacrificing a bonus into a pension avoids tax and National Insurance on money you might not miss, and can keep your income below a threshold such as £100,000.

Gift Aid donations extend your basic-rate band and, like pensions, reduce the income that counts towards the £100,000 taper. That gives higher-rate and additional-rate taxpayers extra relief to claim.

You can also claim higher-rate relief. If you pay into a personal pension (relief at source), only 20% is added automatically, so higher-rate and additional-rate taxpayers must claim the rest back from HMRC. Many never do.

How income tax and National Insurance work

In England, Wales and Northern Ireland the first £12,570 is tax-free (the Personal Allowance). Income is then taxed at 20% up to £50,270 (the basic rate), 40% from £50,270 to £125,140 (the higher rate), and 45% above £125,140 (the additional rate).

Employee National Insurance is charged at 8% between £12,570 and £50,270, and 2% on everything above. These thresholds are frozen, so as wages rise more income is dragged into the higher bands over time. That is one reason effective rates keep creeping up.

Scotland is different

Scotland sets its own income tax and has six bands instead of three: a 19% starter rate, 20% basic, 21% intermediate, 42% higher, 45% advanced and a 48% top rate. National Insurance is the same across the UK.

That means Scottish taxpayers reach higher marginal rates sooner, and the £100,000 Personal Allowance trap is even sharper, with the marginal rate inside it approaching 70%. The calculator switches to the correct Scottish bands when you choose Scotland.

Not financial advice

This guide and the calculator give estimates to help you understand your position. They are not financial or tax advice. Always check figures against HMRC and, for decisions that matter, speak to a qualified adviser.