If you earn between £100,000 and £125,140, you could be paying an effective tax rate of 60% due to the gradual loss of your Personal Allowance. This is often overlooked, but with the right planning, you can reduce your tax liability and keep more of your income. Here’s how to avoid falling into the 60% tax trap in 2025/26.

What is the 60% Tax Trap?

The standard Personal Allowance (the amount you can earn before paying income tax) is £12,570. However, once your total income exceeds £100,000, your allowance is reduced by £1 for every £2 earned above this threshold. This means:

• At £100,000 income, your Personal Allowance starts decreasing.
• At £125,140 income, your Personal Allowance is completely lost.
• This creates a 60% marginal tax rate in this range.

Example Calculation

If you earn £110,000, your Personal Allowance is reduced by £5,000 (£10,000 over £100,000 ÷ 2). This means you pay 40% tax on income above £50,270, but also lose £5,000 of tax-free earnings, effectively creating a 60% tax rate on this portion of your income.

How to Avoid the 60% Tax Trap

1. Increase Pension Contributions

Why it helps: Pension contributions reduce your taxable income, helping you stay below the £100,000 threshold or minimise the impact of the allowance reduction.

How to do it:

• Contribute to a workplace or private pension (up to the £60,000 annual allowance or 100% of earnings, whichever is lower).
• Salary sacrifice arrangements can be used to direct more pre-tax income into your pension.
• Higher-rate taxpayers also benefit from 40% or 45% tax relief on contributions.

Example: If you earn £110,000 and contribute £10,000 into your pension, your taxable income reduces to £100,000, restoring your full £12,570 Personal Allowance and saving £4,000 in tax.

2. Make Charitable Donations via Gift Aid

Why it helps: Gift Aid donations reduce your adjusted net income, potentially restoring some of your Personal Allowance.

How to do it:

• Donate to UK-registered charities and tick the Gift Aid box.
• You can carry back donations to the previous tax year if needed.‍

Example: Donating £5,000 to charity means you can claim 40% tax relief, reducing your tax bill by £2,000, and lowering your taxable income.

3. Opt for Salary Sacrifice Benefits

Why it helps: Certain salary sacrifice schemes lower your taxable income while providing valuable perks.

Options include:

• Pension contributions (most tax-efficient).
• Electric vehicle leasing (benefiting from low Benefit-in-Kind tax rates).
• Childcare vouchers (for eligible employees).
• Cycle-to-Work schemes (offering tax-free bike purchases).

Example: If you sacrifice £5,000 of salary for pension contributions, your taxable income is reduced accordingly, lowering your effective tax rate.

4. Shift Income to a Spouse

Why it helps: If your partner pays tax at a lower rate, transferring assets or income sources can reduce your overall tax burden.

How to do it:

• Transfer income-generating assets (e.g., rental properties, shares) to a spouse in a lower tax band.
• Pay a salary or dividends to a spouse if they work in a family business.

Example: If a higher earner receives £10,000 in dividends but transfers shares to their lower-earning spouse, the income is taxed at 8.75% instead of 33.75%, saving £2,500 in tax.

5. Use ISAs for Tax-Free Income

Why it helps: Income from ISAs is completely tax-free and does not count toward taxable income.

How to do it:

• Maximise your ISA allowance (£20,000 per person for 2025/26).
• Invest in Stocks & Shares ISAs for tax-free capital growth and dividends.

‍Example: A high earner investing in ISAs avoids dividend tax and capital gains tax, keeping more post-tax income.

6. Plan Capital Gains Tax (CGT) Efficiently

Why it helps: Spreading asset sales across tax years can reduce taxable income in a given year.

How to do it:

• Use your £3,000 CGT allowance (2025/26) before selling large assets.
• Spread disposals over multiple years or transfer assets to a spouse.

Example: Selling shares in two separate tax years rather than in one could help keep your total income below £100,000, preventing Personal Allowance loss.

7. Defer Bonuses or Self-Employed Income

Why it helps: If your income is close to £100,000, delaying some earnings into the next tax year can restore your Personal Allowance.

How to do it:

• Request that your employer defers a bonus to the next tax year.
• If self-employed, delay issuing invoices until after 5 April to reduce taxable income.

Example: A £10,000 bonus received in March 2026 may push you over £100,000, but deferring it to April 2026 avoids the 60% tax trap for the 2025/26 tax year.

Final Thoughts: Take Control of Your Tax Bill

Avoiding the 60% tax trap requires careful planning and making use of available tax reliefs. Strategies like pension contributions, Gift Aid donations, salary sacrifice, and shifting income can significantly reduce your effective tax rate.

At Layers Accountancy, we specialise in tax-efficient strategies for high earners. We can help you: Lower your taxable income strategically, Maximise pension and investment tax reliefs, Minimise tax on dividends, salary, and capital gains

Book a tax planning consultation today and keep more of your income in 2025/26!

‍