Three ways to reduce your Income Tax bill if you earn £100,000 or more

18th December 2024

Earning a six-figure salary is a significant milestone and certainly a testament to your hard work and dedication. Achieving this income of £100,000 or more often shows that you’re in a strong position to build considerable wealth for the future.

However, reaching this level of income can also bring unexpected challenges, especially when it comes to taxation.

Above this threshold, you may fall into what is known as the “60% Income Tax trap”, with interactive investor revealing that it affected 23% more people over the 12 months leading to July 2024, than in the previous year – roughly 537,000 people.

This costly quirk in the UK’s taxation system could mean you face an unexpected bill.

So, continue reading to discover how this might affect you, and three practical ways to reduce your potential Income Tax liability.

The “60% tax trap” is a result of quirks in the UK’s taxation system

In the UK, Income Tax rates are typically calculated based on your earnings. In 2024/25, these “brackets” include:

  • 0% on income up to your Personal Allowance of £12,570
  • 20% on income between £12,570 and the basic-rate threshold of £50,270
  • 40% on income between £50,270 and the higher-rate threshold of £125,140
  • 45% on income above £125,140, the additional-rate threshold.

The aforementioned “60% Income Tax trap” arises from the tapering of the Personal Allowance.

For every £2 you earn above £100,000, you lose £1 of your Personal Allowance. By the time your adjusted net income reaches £125,140, you no longer benefit from any Personal Allowance, meaning all of your earnings are subject to Income Tax.

This essentially means that you pay an effective rate of 60% Income Tax on the portion of your wealth between £100,000 and £125,140.

As an example, imagine you earn £110,000 – £10,000 above the £100,000 threshold. Since you would lose £5,000 of your Personal Allowance (£1 for every £2 over the threshold), that £5,000 is now subject to 40% tax, costing you £2,000.

Additionally, you pay £4,000 – 40% of the £10,000 above £100,000. Altogether, you take home only £4,000 of the original £10,000, effectively paying an Income Tax rate of 60% on this portion of your income.

Three ways to potentially reduce your Income Tax liability and avoid the trap

Thankfully, there are several ways to reduce a potential tax bill so you don’t fall victim to the 60% trap – read on to find out how.

  1. Increase contributions to your private pension

Perhaps one of the more effective ways to reduce your adjusted net income and avoid the 60% tax trap is to increase contributions to your pension.

When you contribute to your private pension, those contributions are typically deducted from your income, lowering the amount that is subject to Income Tax.

For instance, if you earn £110,000 each year, you would be paying the effective 60% rate on the £10,000 above the £100,000 threshold.

Though, if you contributed £10,000 to your pension, you could retain your full Personal Allowance whilst still benefiting from tax relief on contributions at your marginal rate.

This means that your pension fund continues to grow, and you avoid paying excessive tax on that portion of your income. Pension contributions are especially beneficial, as they allow you to invest in your future whilst making your income more tax-efficient.

Just remember that if you’re a higher- or additional-rate taxpayer, you must claim your extra tax relief through your self-assessment tax return.

  1. Consider salary sacrifice

“Salary sacrifice” is another effective way to reduce your income and avoid the trap.

This Government-backed initiative allows you to exchange a portion of your salary in exchange for non-cash benefits, such as:

  • Pension advice
  • Financial protection
  • Employer-provided childcare.

By reducing your overall salary, you can not only lower your taxable income, but also potentially benefit from lower National Insurance contributions (NICs).

For instance, if you exchange part of your salary for employer-funded childcare, your take-home pay would usually be reduced, potentially keeping your adjusted net income below the £100,000 threshold.

One of the benefits of making the most of salary sacrifice is that it can be tailored to your specific needs. Indeed, you might choose to use it for benefits that align with your financial goals, such as these additional pension contributions, while also reducing your tax liability.

  1. Seek professional advice

As you can see, navigating the tax system in the UK can get complicated at times, especially as your income grows.

Thankfully, a Financial Planner could help you better understand your tax position and explore several strategies to mitigate and avoid the 60% trap.

For instance, we can review your earnings and recommend the most tax-efficient ways to allocate your income, and then develop a comprehensive plan that incorporates your long-term goals, such as retirement planning.

Moreover, your Planner can ensure you’re taking full advantage of the tax reliefs and Government schemes available to you, namely salary sacrifice.

By working closely with a professional Planner, you might be able to gain a clearer understanding of your options, and the confidence needed to make informed decisions that support your future plans.

Get in touch

If you’re a higher earner and worry about falling into the 60% tax trap, then we can help you take the steps necessary to avoid it.

Email us at enquiries@pen-life.co.uk, or call 01904 661140.

If you’re already a client and are expecting a salary increase that could affect you in this way, get in touch with your Financial Planner today.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only. All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.

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