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You might think the highest rate of income tax in the UK is 45%. But for many people earning over £100,000, part of their income is effectively taxed at 60% – and in Scotland, even more.
What’s more, many people fall into this trap without realising it. Your basic salary might be below £100,000, but a bonus, pay rise or benefits could quietly push your total income over the line.
The good news is that this tax hit is often avoidable. By making a contribution into your workplace pension you may be able to reduce your taxable income and avoid the 60% tax rate altogether.
With the tax year-end approaching – on 5 April 2027 – there is still time to act.
The personal allowance – the key to the 60% tax trap
You normally get a personal allowance. That’s £12,570 of income you don’t pay tax on.
Once your income goes over £100,000, that allowance starts to disappear. This is what creates the so-called 60% tax rate. The effective 60% rate only applies to income between £100,000 and £125,140.
You won’t need to worry if your income is below £100,000, as this will be taxed at the usual rates. And any income above £125,140 is also taxed at the normal top rate. It’s worth noting these figures are for England, Wales and Northern Ireland. In Scotland the effective rate is not 60% but 67.5%.
How losing your allowance creates a 60% tax rate
The 60% tax rate applies to every £1 you earn over £100,000 (for income between £100,000 and £125,140). What happens is you lose 50p of your tax-free allowance.
For every £1 you earn over £100,000, that £1 is taxed at the normal higher rate of 40%, meaning 40p goes in tax. However, you also lose 50p of your personal tax-free allowance. That lost 50p then becomes taxable at 40%, resulting in a further 20p of tax. In total, you pay 60p in tax on that £1 and keep 40p, creating an effective tax rate of 60%. This only applies to income between £100,000 and £125,140, where the personal allowance is gradually withdrawn.
On top of income tax, employees also pay 2% National Insurance on income in this range. That means the total deduction from your pay can reach 62% in England, Wales and Northern Ireland and 69.5% in Scotland.
Why this matters even if you earn more than £125,140
Once your income hits £125,140, your personal allowance is fully gone. After that, the tax rate drops back to 45% in England, Wales and Northern Ireland and 48% in Scotland – any income above £125,140 is taxed at this rate.
But the damage is already done. You’ve lost your full personal allowance. And if you’re a parent, you may also lose access to 30 hours of free childcare.
The legal way to avoid the 60% tax
Paying into a workplace pension reduces your taxable income. It’s always helpful to begin saving for later life. But if your pension contributions bring your taxable income below £100,000, you get another benefit – your full personal allowance is essentially restored and the 60% tax disappears.
Let’s take an example:
Say you earn £110,000 and you want to contribute to your workplace pension to bring your taxable income back to £100,000. You only need to contribute £8,000 into your pension. Your pension provider automatically adds £2,000 in basic-rate tax relief. So altogether £10,000 goes into your pension.
Crucially, workplace pension contributions must be made by 5 April to count for the current tax year.
Remember: You’ll need to complete a self-assessment tax return to reclaim the additional tax relief you’re entitled to. HMRC will then refund the extra tax you paid. This method applies to non-workplace pensions.
How ‘carry forward’ can also help
You’re not just limited to this year’s pension allowance. You can also use unused allowances from the previous three tax years.
You can do this if you were a member of a workplace pension scheme in those years and you earn enough in the current tax year to cover the contribution. This can let very high earners reduce taxable income significantly in one year. A quick annual review before the tax year ends can help ensure you’re using all your available allowances. Carry Forward and save more in your pension
A warning if you earn a very high income
It’s worth knowing that if your income is very high, your pension allowance may be reduced under the tapered annual allowance rules. In simple terms:
- The taper can apply if income exceeds £260,000
- The allowance reduces gradually
- The minimum allowance is £10,000
The rules are complex, and mistakes can be costly. If this applies to you, it may be worth seeking advice from a qualified financial adviser. For more information, read our guide to the ‘tapered’ annual allowance
Final thoughts – the deadline is approaching sooner than you think
The 60% tax rate is one of the least understood – and potentially most costly – features of the UK tax system. But for many people, it’s also avoidable, if they act in time.
For those affected, workplace pension contributions can be a powerful way to reduce tax, restore lost allowances and avoid paying more than necessary, while boosting long-term retirement savings at the same time.
Important information - This is for information purposes only and the views contained are not to be taken as advice or a recommendation for any product, service or course of action. Tax treatment depends on individual circumstances and pension rules may change in the future. If you need advice about how any of this information applies to you personally, you should contact an authorised financial adviser. You cannot normally access your pension savings until age 55. This is due to rise to 57 in 2028.
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