Many people aren’t aware of the 60% tax trap in England and Wales – which is higher in Scotland at 63%.
How does it work? Who has to pay the 60% tax rate and why? You’ll learn all about it in this post.
Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
What is the 60% tax trap?
UK taxpayers are entitled to the personal allowance – an amount they can earn tax-free each tax year** without paying income tax. For the tax year 2023-24, the personal allowance is £12,570.
** the tax year runs from 6 April to 5 April each year
But once an individual’s taxable income goes over £100,000 they begin to lose their personal allowance at the rate of £1 for every £2 earned. This is known as the personal allowance restriction.
Here’s an example:
Penny lives in Wales and earns £110,000 Since her income exceeds £100,000 her personal allowance is restricted by £5,000 and drops from £12,750 to £7,750.
As a result of the restriction, Penny has less free pay available and will be caught by the 60% tax trap.
How is the 60% Tax Bracket Calculated?
The 60% income tax rate is a calculated as a combination of:
- Repaying the personal allowance on income between £100,000 to £125,140
- Paying the 40% tax, as normal, on income over £100,000
Here’s an example:
Penny lives in Wales and earns £110,000. Since her income exceeds £100,000 her personal allowance is restricted by £5,000 and drops from £12,750 to £7,750.
Step #1:
Penny must pay 40% tax to ‘repay’ personal allowance of £5,000 – which is effectively 20% on £10,000 or 40% on £5,000.
Step #2:
Penny must pay 40% higher rate tax, as normal, on her income above £100,000. Penny has paid 60% tax on her income above £100,000 which is 20% in step 1 plus 40% in step 2.
| Tax Band | Taxable Income | Tax Rate | Income Tax |
| Personal allowance | £12,570 | 0% | £0 |
| Basic rate | £37,700 | 20% | £7,540 |
| Higher rate | £59,730 | 40% | £23,892 |
| Personal allowance restriction | £5,000 | 40% | £2,000 |
| Total Income Tax | £33,432 |
The 63% Income Tax Trap in Scotland
In Scotland the higher rate of tax is 42% – so 63% is calculated as 42% plus 21% on the personal allowance restriction.
How to Avoid the 60% Tax Bracket?
Always seek professional advice for help managing your taxable income. The most common recommended way to avoid the 60% tax trap, legally are:
Pension Contributions
In simple terms, pension contributions are deducted from your gross income for tax reasons. It means you are taxed on your income minus pensions contributions (up to a maximum of £60,000 for the tax year 2023-24). So by increasing your pension contributions you’ll reduce your income falling into the 60% tax bracket or avoid it altogether.
DON’T FORGET
You’ll need to transfer cash into your pension to be eligible for the reduction which reduces your take-home pay.
Claiming Expenses
Claiming expenses reduces your taxable income and the amount of income falling into the 60% tax bracket.
If you are a sole trader make sure you are tracking all your allowable business expenses so you maximise your claim when you complete your self-assessment tax return.
You could also consider forming a Limited Company to take advantage of other tax allowances such as the dividend allowance. Contact an accountant to discuss the pros and cons of a Limited Company and help paying yourself tax efficiently as a Limited Company Director.
Read this guide to learn how to keep records and track expenses when you’re self-employed.
If you are employed by someone and are paying business expenses that you are not being reimbursed for, then you may be eligible to claim tax relief on expenses through your payslip.
Read this guide to check whether you’re able to claim tax relief on employment expenses and how to do it.