Simple way you can avoid 60% 'tax trap' that'll hit you with a "double whammy" and make you worse off

THERE is a simple way you can avoid a “tax trap” that'll hit you with a "double whammy" and make you worse off.

A total of 698,000 are in the £100,000-£125,000 income bracket during the 2024/25 tax year – a 12 per cent increase on the previous year and a near-doubling over five years.

Taxpayers within the band face an effective marginal rate of 60 per cent due to the tapering away of the tax-free personal allowance. 

The situation is exacerbated for parents by the sudden removal of government-funded childcare support, leaving someone earning £101k significantly worse off than someone earning £99k.

Antonia Medlicott, Founder & MD at Stonehouse-based Investing Insiders, helped to create the calculator that can be used to help avoid the trap.

She said: "The £100k tax trap was once seen as something that affected just a privileged few. But thanks to the government freezing tax thresholds while wages continue to rise, this is no longer the case. 

"When your yearly income hits £100,000 two things happen that can have an outsize impact on your finances: You lose your tax-free Personal Allowance and you lose access to free childcare schemes worth thousands of pounds to working parents. 

"Together, these can take a big - and many would say very unfair - bite out of your real income. Our £100k tax trap calculator is designed to help those who find themselves in this situation. We specifically wanted to help with big questions like whether that pay rise is actually worth it, and how to limit the potential losses.

"There are ways to take the pay rise and keep more of your money, but as with all complex tax issues, it's vital you are aware and prepared."
 

Eamonn Prendergast, Chartered Financial Adviser at Bromley-based Palantir Financial Planning Ltd, shared a simple way you can navigate around the tax trap.
 

He said: "The so-called £100k trap is now catching nearly 700,000 people, almost double in five years, showing just how outdated the system has become. £100,000 is no longer ‘wealthy’, especially for a single earner with children facing high living costs. 

"Once you factor in the loss of the personal allowance, childcare support, and National Insurance, the real marginal tax rate can hit around 62%. The best way to mitigate it is to reduce taxable income, often through pension contributions, but not all families can afford to lock money away. 

“Tools like calculators raise awareness, but they don’t fix the fundamental unfairness. Rachel Reeves could reform the taper or shift childcare support to household income, but with a £40bn fiscal gap, families shouldn’t expect major relief soon.”

Philly Ponniah, Chartered Wealth Manager and Financial Coach at Philly Financial, said she had seen a huge jump in client enquiries.

She added: "The number of people caught in this trap has increased massively, and I’ve personally seen a 300% jump in client enquiries in the past year on this topic. The real driver isn’t just the 60% marginal tax rate, it’s the double whammy of also losing government-funded childcare hours. 

"For some families, that cliff edge costs up to £9,000 a year on top of the tapering personal allowance. It means a parent earning £101,000 can be far worse off than one earning £99,000, which makes no sense. 

"People are turning to pensions if they’re in the know, or we are seeing people turning down pay rises and reducing down working days each week which is not good for economic output. 

“I highly doubt the government will change anything at this level as they wouldn’t want to be seen to be supporting the high earners - but this bracket are getting more and more frustrated and are seeking other places to live and work. This is not good for the country.”

Kundan Bhaduri, Entrepreneur and Landlord at London-based The Kushman Group, hit out at Chancellor Rachel Reeves.

He said: "Rachel Reeves has no intention of reforming this cash cow because it generates billions while targeting that politically unfashionable demographic. A few ways to mitigate this will require immediate action if you are serious; through pension contributions, salary sacrifice arrangements, and Gift Aid donations to reduce your adjusted net income to just below £100,000. 

“The fundamental injustice of penalising productivity at rates exceeding those faced by genuine high earners is astounding. Plan smart with things like timing bonuses, maximising your annual allowances, and exploiting carry-forward provisions for pension contributions that restore personal allowances while securing retirement funding.”

Scott Gallacher, Director at Leicester-based Rowley Turton, added: “The fact that nearly 700,000 people are now caught in the 60% tax trap shows just how punitive and unfair this quirk of the taxsystem has become. Sadly, this isn’t an accident — it’s the deliberate result of successive governments, Conservative and Labour, using the stealth tax of fiscal drag to pull more of our strivers into higher and higher taxes. 

"The good news is that many can take steps to reduce the impact. Sensible tax planning, such as making pension contributions or using salary sacrifice, can often remove them from this band entirely, while at the same time giving a major boost to their retirement savings. But the key is to be proactive — leaving it too late can mean missing valuable opportunities to cut your tax bill.”