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Earning over 100k? how to get 60% tax relief

16 February 2021

How high earners can steer clear of the 60% tax trap

With just a few weeks left before the end of the current tax year, it’s time to shine the spotlight on a wrinkle in the tax code that catches out a lot of unsuspecting people every year. We call it the 60% tax trap.

What do we mean? Well, for those whose earnings go beyond £100,000 in the tax year, some of their income will effectively be taxed at an eye-watering 60%. Now is definitely the time to be talking about this, because a lot of people earning bonuses could find their annual earnings exceed the £100k threshold before the end of the tax year. Those people could be in for a rude awakening when they read their payslip.

Understanding income tax rates

So how does the tax trap catch people out? First of all, let’s take a look at the current income tax rates and thresholds for earnings if you live in England, Wales or Northern Ireland.

Earnings Rate
£0 to £12,500 Personal allowance: no income tax payable
£12,501 to £50,000 Basic rate: 20%
£50,001 to £150,000 Higher rate: 40%
Over £150,000 Additional rate: 45%


One of the positives of this tiered structure is that most people earning an income get to benefit from that tax-free personal allowance, while higher earners will pay a combination of basic rate and higher rate tax, depending on how much they earn. But here comes the wrinkle.

When an individual’s taxable income reaches £100k, their annual personal allowance is gradually cut by £1 for every £2 of additional income. Once their income reaches £125k, they lose their tax-free personal allowance completely, meaning they start paying the higher rate of tax on their income much sooner. This means that those in the £100k-£125k income bracket suddenly find themselves paying a 60% rate of tax on that portion of their earnings.

Here’s how easy it is to fall into the 60% tax trap

How does this work in real life? Let’s say you earn a £100k salary and – good news – you’ve been awarded a £1,000 bonus. Ready for the bad news? Not only will this bonus be taxed at 40% (leaving you with £600), but you also lose £500 from your tax-free personal allowance. To add insult to financial injury, that £500 will also be taxed at 40%, costing you another £200.

Suddenly, when you add it all together, that £1,000 bonus has ended up costing you £600 – and you’ve paid an effective tax rate of 60%. This tax trap gets worse the more you earn over £100,000.

Fortunately, there’s one very straightforward and tax-efficient way to steer clear of the tax trap, which is to use your income to make pension contributions. This can help you to reclaim your personal tax allowance and also get tax relief on the amount you pay in to your pension. In fact, it could turn a tricky – and expensive – problem into a highly tax-efficient solution.

Aren’t pensions a bit too inflexible?

It’s somewhat ironic that pensions have a reputation as such a traditional and conventional – dare we say it – even boring product. It also doesn’t help that choosing to invest into a pension is often unfairly represented as having to make that painful choice between spending the money now, or putting it away for retirement.

In reality, pensions can be far more flexible than most people give them credit for. The key is that the government offers really quite generous incentives to encourage people to save for their retirement. Think of it as a bonus from the government.

The tax relief from the government acts as a ‘top-up’ on the amount you contribute to your pension, and the rates of tax relief are the same as the rates paid on income earned. So, in other words, basic rate tax-payers get 20% pension tax relief on their contributions, higher rate tax-payers get 40% and additional rate taxpayers get 45%.

How does pension tax relief work when you’ve passed the £100k threshold?

Here’s the really smart bit: just as having an income that takes you beyond the £100k mark causes a double tax hit, choosing to make pension contributions can have the opposite effect. It lets you claim tax relief on the amount you place into your pension and also lowers your taxable income back to a level where you can regain some of the personal tax allowance you had just lost.

So, going back to our previous example, if you take your £1,000 pay rise and turn it into a pension contribution, then not only does your that money benefit from higher rate tax-payer pension relief of 40%, but it also takes your annual income back below the dreaded 60% tax zone.

Thanks to the government ‘bonus’ you receive for paying into your pension, the benefits increase the more you earn. For example, if you have earnings of £125k (and have therefore lost all your personal tax allowance), making a pension contribution of £20,000 means the government will also add on another £5,000 in basic rate pension tax relief, bumping up your total contribution to £25,000.

HMRC will take that £25,000 figure to adjust your taxable income back down to the £100,000 mark. So, not only have you saved yourself £10,000 in tax straight away, you’ve also gained another £5,000 of tax relief for your pension. In addition, if your employer offers salary sacrifice as part of your company pension scheme, you can claim even more tax relief, as your employer may pass on the money they save in national insurance contributions.

  Before pension contribution After pension contribution
Taxable income £125,000 £100,000
Personal pension contribution £0 £20,000
Pension relief £0 £5,000
Personal tax allowance £0 £12,500
Total benefit £0 £15,000


Using your pension to take control of your taxes

If all of these numbers are starting to make your head spin, don’t worry. Pension planning can be complicated, so you should determine whether making large pension contributions suits your personal circumstances. A financial adviser can take a good look at your financial situation and come up with a strategy designed specifically for your needs.

It’s also worth remembering that annual pension contributions are capped at £40,000, so a financial adviser can also help to make sure you don’t go over this amount. Anyone with a taxable income of more than £240,000 will also see the annual allowance for their pension tapered, so that for every £2 of income earned over £240,000, their annual allowance is reduced by £1.

More importantly, tax and pension rules can change at short notice, so it’s well worth having an adviser on hand who can keep on top of any changes. They can highlight anything that could affect you, and help you to respond accordingly.

This type of pension planning strategy can be of great benefit to high earners who don’t want to be unfairly penalised by the idiosyncrasies of the UK tax system, and recognise the value of paying into their pension while they can. Using this income to make pension contributions is both an instant solution to a difficult problem and also a way to significantly increase your retirement pot.

In other words, you really can have your cake and eat it too.


Saltus financial planning Ltd is authorised and regulated by the financial conduct authority. Information is correct to the best of our understanding as at the date of publication. Nothing within this article is intended as, or can be relied upon, as financial advice. Capital is at risk. You may get back less than you invested. 


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