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60% tax trap
Earn between £100,000 and £125,140? Don’t get caught in the tax trap.
What’s the tax trap?
You're probably aware that higher rate tax is 40%, but did you know that you could be paying an effective rate of 60% tax on some of your income?
See our video (1min 35secs) and read this page to find out how to escape the trap.
If you live in Scotland, tax rates are different, but the same tax trap still exists.
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As your income increases above £100,000, your personal tax allowance, or the amount you can earn tax free, reduces. For every £2 of income you earn over £100,000, you lose £1 of personal allowance. And that continues until you pay tax on every penny.
In Olive’s case she earns £110,000.
- This means she loses £5,000 of her personal allowance.
- She therefore not only pays 40% tax on the final £10,000 that she earns.
- She also pays 40% tax on £5,000 of her income she didn’t previously, due to the personal allowance she has lost.
In the example below we compare how much of your income falls into each marginal rate of tax. Look closely at the 40% section and see how this part grows as your income exceeds £100,000. Also note how your personal allowance is reduced.
If Olive puts £10,000 into her pension, she reduces her ‘adjusted net income’ to £100,000. That means she doesn’t lose her personal allowance. She doesn’t fall into the tax trap, and she helps grow her pension, which could give her more money in retirement.
My income's going over £100,000
Protect your childcare benefits
You could be losing out on big benefits if you or your partner earn £100,000+.
This includes up to 30 hours of free childcare each week. And up to £2,000 tax-free childcare each year.
For example, Jane takes a promotion, increasing her yearly income from £90,000 to £105,000 each year. This tips her over the £100,000 threshold. As a result, she loses her entitlement to 30 hours of free childcare every week. She also loses the 20% government top-up for tax-free childcare.
Will I need to complete a tax return?
When saving into a personal pension, tax relief plays a significant role. If you're a higher rate taxpayer, it's important to complete a tax return. This means you can claim the tax relief back that you're entitled to.
The government website has a list of who must legally complete a Self-Assessment.
This includes:
- anyone earning over £150,000
- anyone who's received any untaxed income, for example from rental property or dividends.
How to escape the tax trap
Financial advice for a better future
If you earn more than £100,000 in sole income or have £100,000 in savings, investments and/or a personal pension, then our partners at Schroders Personal Wealth can provide holistic financial advice that’s personal to you.
Meetings up to and including the presentation of your initial financial plan are free. Fees and charges apply if you take out a product or service. Check your eligibility and book an appointment with Schroders Personal Wealth.
Let’s look at the details
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If you’re expecting your income to exceed £100,000 this year, it could be worth checking with your employer to see if it’s possible to top up your workplace pension. This can make sense, especially if they offer to contribute too. Contact your employer directly to find out more.
Another option is to consider setting up a separate personal pension. See our pension options.
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It’s easy to open a personal pension with us and start contributing straight away, either on a monthly basis or as a lump sum.
We offer two different pension options, depending on how involved you want to be in selecting investments.
- Ready-Made Pension: Our retirement experts manage your pension investments for you, creating a portfolio that’s suitable for your age and expected retirement date.
- Self-Invested Personal Pension (SIPP): Gives you the choice of where to invest – putting you in control of your investment strategy and financial future.
Pensions are a long-term investment. What you get back isn’t guaranteed and can go down as well as up. You could get back less than the amount(s) paid in.
By having your pension visible alongside your bank account in our app, it’s easy to keep track of. For more information or to open a pension, visit our pensions page.
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The current income tax bands for England and Wales are as follows:
Income bands for England and Wales. Band
Taxable income
Tax rate
Band
Personal Allowance
Taxable income
Up to £12,570
Tax rate
0%
Band
Basic rate
Taxable income
£12,571 to £50,270
Tax rate
20%
Band
Higher rate
Taxable income
£50,271 to £125,140
Tax rate
40%
Band
Additional rate
Taxable income
over £125,140
Tax rate
45%
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Tax bands differ in Scotland, but that doesn’t mean the tax trap doesn’t impact you. In fact, it’s even bigger in Scotland as an advanced rate taxpayer pays 45% in income tax. Which means when you lose your personal allowance, you’re paying an effective rate of 67.5% tax on the income you’re earning between £100,000 and £125,140.
The current income tax bands for Scotland are as follows:
Income tax bands for Scotland. Band
Taxable income
Scottish tax rate
Band
Personal Allowance
Taxable income
Up to £12,570
Scottish tax rate
0%
Band
Starter rate
Taxable income
£12,571 to £15,397
Scottish tax rate
19%
Band
Basic rate
Taxable income
£15,398 to £27,491
Scottish tax rate
20%
Band
Intermediate rate
Taxable income
£27,492 to £43,662
Scottish tax rate
21%
Band
Higher rate
Taxable income
£43,663 to £75,000
Scottish tax rate
42%
Band
Advanced rate
Taxable income
£75,001 to £125,140
Scottish tax rate
45%
Band
Top rate
Taxable income
Over £125,140
Scottish tax rate
48%
Free financial coaching
If you're a Lloyds Premier customer, you can use our Financial Coaches to help you achieve your goals.
We won't offer advice. Please refer to Schroders Personal Wealth for this.
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