21 November 2025
general
Between June and August 2025, the Office for National Statistics (ONS) reported average annual wage growth of 4.7%. With Income Tax thresholds remaining frozen until April 2028, you may face a higher tax bill as your income rises.
Wage increases can be particularly troubling for those nearing £100,000 in annual earnings. Usually, income between £100,000 and £125,140 a year is effectively taxed at a rate of 60% – known as the “60% tax trap”.
Additionally, earning over £100,000 a year may result in the loss of valuable childcare benefits.
According to City A.M., the number of UK taxpayers earning over £100,000 was 16% higher in 2022/23 compared to the previous year. Consequently, an increasing number of people could be falling into the 60% tax trap as wages continue rising.
Fortunately, you may be able to avoid the 60% tax trap without having to decline a pay rise that takes your earnings over £100,000.
Read on to discover what the 60% tax trap can mean for your finances, what benefits you could lose when you earn over £100,000, and what tax-efficient steps you can take to stay below the threshold.
Earnings over £100,000 have an effective 60% tax rate
Taxpayers earning between £50,270 and £125,140 typically pay the higher rate of Income Tax, which is 40% as of 2025/26.
However, for the portion of your earnings between £100,000 and £125,140, you effectively pay a marginal tax rate of 60%.
Usually, the first portion of your annual income is tax-free, which is called your “Personal Allowance”. In 2025/26, this stands at £12,570.
However, for every £2 that your earnings exceed £100,000, you lose £1 of your Personal Allowance.
Your lost allowance is then taxed at your marginal rate of 40%. So, for every £1 you earn over £100,000, 60p goes to HMRC.
As an example:
Once your income reaches £125,140, you lose your full Personal Allowance and move into the additional-rate 45% tax bracket.
You could lose out on valuable childcare benefits after passing £100,000
From September 2025, in England, children aged nine months to four years are generally entitled to 30 free hours of childcare a week, provided both parents are working.
However, if either you or your partner individually earns over £100,000 a year, you could become ineligible for the majority of the funding. As such, your child could only receive 15 hours a week free, and only between ages three and four.
According to Hatching Dragons, without funding, a nursery for a child under two can cost £85 to £95 a day on average. Meanwhile, parents with funding are likely to pay an average of £47.79 a day.
As a result, your income tipping over the £100,000 mark could cost you more than the pay rise is worth if you have young children in need of childcare. Sky News reports that a parent would need to earn £137,000 before they had the same disposable income as when they earned £99,000, if they lived outside London with two children under four.
Your total income counts towards the tax threshold, not just your salary
If you’re nearing the £100,000 threshold, it’s important to remember that it’s not just your salary that is taken into account. Your adjusted net income, which determines your tax rate and benefits eligibility, can also include:
As a result, it’s often worth monitoring your total annual income to avoid accidentally passing the £100,000 mark.
You may be able to reduce your adjusted net income through salary sacrifice schemes
Often, salary sacrifice schemes can reduce your adjusted net income by deducting from your pre-tax salary. This involves your employer reducing your salary before Income Tax and National Insurance are calculated in return for another benefit.
In some cases, this can help keep your income below the £100,000 threshold – meaning you may avoid the 60% tax trap and retain your childcare eligibility.
Employers might offer a range of salary sacrifice options, from childcare vouchers to cycle-to-work schemes. However, not all these schemes will reduce your adjusted net income, so it may be worth seeking advice before relying on salary sacrifice to keep you under the £100,000 threshold.
You could stay below the £100,000 threshold by boosting your pension contributions
A common way to reduce your adjusted net income is to pay more into your workplace pension. This could be through salary sacrifice, which is generally tax-exempt for pension contributions, and the deductions from your salary will be taken before Income Tax and National Insurance are calculated.
Alternatively, if your employer doesn’t offer salary sacrifice, you can still claim the higher rate of tax relief on your contributions via self-assessment. This will usually reduce your adjusted net income, restoring your Personal Allowance and saving you from 60% tax.
Either way, increasing your contributions could help keep your annual adjusted net income below £100,000. Additionally, paying more into your pension could deliver further benefits as you plan for retirement.
Boosting contributions early could help grow your pot further through compound investment returns. What’s more, if your employer is willing to match your contributions, your pot could get an additional boost.
Increasing your monthly pension contributions could be an effective and tax-efficient way to help mitigate your current tax liability, retain childcare funding eligibility, and prepare for a comfortable retirement.
Get in touch
If you’re looking to reduce your adjusted net income without losing out on valuable income, email enquiries@jesellars.co.uk or call 01934 875 919 to find out how we can help you find a solution that’s right for your circumstances.
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.
The Financial Conduct Authority does not regulate tax planning.
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.
Workplace pensions are regulated by The Pensions Regulator.
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.
