What is the 60% tax trap?

In the 2022/23 tax year, over half a million taxpayers paid 60% tax on part of their taxable income. This is an increase of 23% compared to the previous tax year. As inflation rises and salaries increase more people are being pushed in to higher tax rates. 

Income tax rates in England, Wales and Northern Ireland are spread over three taxes. Those in the Basic Rate Band (BRB) pay tax at 20% while those in the higher and additional rate bands pay 40% and 45% respectively. In Scotland, the rates range from 19% to 48%.

Most individuals in the UK are eligible for the personal allowance of £12,570. However, once an individual's income exceeds £100,000, their personal allowance is withdrawn by £1 for every £2 by which adjusted income exceeds £100,000. Once adjusted income reaches £125,140 there is no personal allowance left. 

When do you fall into the tax trap?

The 60% tax trap is applicable to individuals earning between £100,00 and £125,140 and having their personal allowance restricted. For every £100 of income between these amounts, you’ll only get £40 of income in the bank as £40 is paid in income tax and £20 is lost by the reduction of the personal allowance. 

Managing your income through tax planning may help to mitigate your exposure to this. For example, taking measures to reduce your adjusted net income below £100,000 will mean you keep your personal allowance. Paying into a pension and making donations to charities may help to do this and can reduce your tax liability. 

It’s always worth speaking to an accountant when it comes to tax planning. 

For more information on income tax planning for individuals read our guide here.  

If you would like any further guidance in this area, please contact us on 01257 277 999 or use our simple online contact form to arrange a free initial consultation. 

Date published 13 Feb 2024 | Last updated 23 Jul 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

---