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MoneyWeek story - how to beat the 60% tax trap

Journalist: Marc Shoffman, Freelance

ended 05. September 2024

I am writing an explainer for MoneyWeek this morning on the 60% tax trap for high earners. 

I am just looking for views on how people can fall into it, how it works and ways to avoid it.

Who does it typically apply to? How to reduce your tax bill e.g pensions?

Should you reject a pay rise if it pushes you into a 60% tax bracket?
 

5 responses from the Newspage community

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Editor
Anita Wright
Independent Financial Adviser at Ribble Wealth Management
The 60% marginal tax rate applies when income exceeds £100,000 due to the tapering of the personal allowance. For every £2 earned above this threshold, £1 of the £12,570 allowance is lost, disappearing entirely at £125,140. High earners between £100,000 and £125,140 commonly face this issue. To avoid this, making personal pension contributions is a highly effective strategy, as it reduces your adjusted net income by expanding your basic rate tax band allowing you to keep more of your personal allowance while also providing significant tax relief. Many of my high-earning clients use pensions as a tax planning tool, gaining up to 60% tax reduction. Rejecting a pay rise is rarely a sensible option. However, if a pay rise pushes you into the 60% tax bracket, it’s a good opportunity to reassess your financial planning and tax strategies and instead of rejecting it, use it as an opportunity to make additional pension contributions, which will help mitigate the higher tax rate.
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Gabriel McKeown
Head of Macroeconomics at Sad Rabbit - Substack Newsletter
In the labyrinth of British taxation lurks a beast that few see coming, a 60% effective tax rate. This fiscal anomaly affects individuals earning between £100,000 and £125,140, creating a tax rate that surpasses the highest official rate of 45%. However, high earners can employ several strategies to mitigate this tax burden, with pension contributions being a particularly effective tool. By increasing contributions, individuals can reduce their taxable income, potentially bringing it below the £100,000 threshold, where the trap begins to take effect. Pension contributions can be a powerful tool in tax planning, offering immediate tax benefits while bolstering one's financial future. With careful planning and the right strategies, high earners can turn this potential pitfall into an opportunity for more proactive wealth management. So, while the 60% tax trap may seem like a fiscal black hole threatening to swallow hard-earned income, it need not be a financial death sentence.
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Ross Lacey
Director & Independent Financial Adviser at Fairview Financial Management
The 60% tax trap is something we deal with a lot with for the clients we work with.

When you also factor in national insurance at 2%, it means that for every £1 earnt in this window, someone is only getting 38p of it in their pocket!

We actually did a blog on this recently along with the ways to mitigate it which may help your article: https://fairviewifa.co.uk/higher-rate-taxpayers-beware-of-the-60-tax-trap/

As a summary, pension contributions, salary sacrifice schemes and charity donations are good ways to overcome this.

I often find when showing the difference between taking that 38p today, or having it diverted to the pension instead, which could then be drawn in the future at an effective 15% tax (25% tax free and the remaining at 20% income tax), it makes a very compelling case.

Some employers will also share some of their national insurance saving (13.8%) on the amount that is sacrificed to the pension, which boosts things even further!
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Adam Pickett
Independent Financial Adviser at McLaren Capital
This 60% refers to the fact that once your income reaches £100,000 per annum, your personal allowance (£12,570 of tax free income) begins tapering away. This means that for every £100 you earn between £100,000 and £125,140, you only get to keep £40 (£40 is paid in income tax, and £20 is lost from tapering)

The problem is exacerbated further if you have children. Because of the removal of free childcare hours and tax-free childcare at the threshold, this can result in an effective tax rate of over 100%. Savings or rental income can take you over this threshold as well. The result is a situation where you can take home more money with a gross income of £95,000 than £105,000!

The good news is that you can take steps to fix this. Making pension contributions can keep your gross salary below the threshold. You can use ISAs to keep your savings income tax-wrapped, and use a lower income partner to hold rental properties etc. Some companies will also allow you to purchase extra holiday.
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Chloe Phillips
Chartered Financial Planner at Pura Vida Financial Planning
I am talking to more and more individuals falling into the 60% tax trap. Not only do you gradually lose your personal allowance, meaning more of your hard earned income is subject to income tax. Those who work for tech companies may also have stock options such as Restricted Stock Units (RSUs) that push them into this category without realising due to how they are treated as taxable income when they 'vest'.

Working parents also lose the valuable tax free childcare offered by the goverment which help reduces the cost of sky high nursery fees and wrap around care.

Careful planning around pension contributions into your workplace pension or personal pension can help you regain tax free child care and your personal allowance. However, remember this is claimed via your self assessment tax return and does not happen automatically.