More being caught in 60% tax trap

A freedom of information request by the Financial Times to HM Revenue & Customs (HMRC) revealed that the number of individuals caught in the 60% tax trap had risen by 45% in just two years.

The figures showed that in the 2021-22 tax year, a total of 436,000 taxpayers fell into the 60% tax bracket, while in the 2023-24 tax year, this number had risen to 634,000, an increase of 45%.

Unfortunately, this trap is only becoming more widespread with time as wages grow but personal allowance thresholds remain frozen.

A major driver of this is the income tax bands have been frozen until 2028, and this includes the tax-free personal allowance threshold, which has been frozen at £12,570 since April 2021. With Chancellor Rachel Reeves announcing in her Autumn Budget that the freeze would be maintained until April 2028, the number of taxpayers caught in the tax trap will likely only increase further as wages creep to keep up with inflation and the rising cost of living but thresholds remain the same.

Check out our article to find out how you can take steps to avoid these higher rate tax traps.

What is the ‘60% tax trap’?

The ‘60% tax trap’ refers to the income band of £100,000 to £125,140, between which earners will effectively experience a 60% tax rate on their income. This is because for every £2 you earn over £100,000 each year you lose £1 worth of your £12,570 tax-free personal allowance. Your tax rate only reduces to the additional rate of 45% after the entirety of your personal allowance for that year has been eroded, i.e. on income above £125,140.

For example, someone earning £100,000 who receives a bonus of £1000 will only receive £400 of his bonus. This works out as follows:

He immediately loses £400 to the standard 40% higher rate tax, leaving him £600. 
As he loses £1 for every £2 earned over £100,000, his £1000 bonus translates to £500 deducted from his original tax-free personal allowance. This deduction of £500 is then retroactively taxed at his current standard rate of 40%, meaning he pays another £200. 
After paying the original tax of £400 and then the subsequent tax of £200, he is left with only £400 of his original £1000 bonus, meaning he has effectively experienced a 60% tax rate.

If you’re concerned you may fall into the 60% tax trap, why not get in touch and see how we can help. Controlling your income with your pension to get the best outcome for your personal financial situation is complex and time-consuming. Many people find that getting the help of a financial adviser will seriously improve their financial outcome and wellbeing.

If you want to find out more, why not give us a call on 0333 323 9065 or book a free non-committal initial consultation with one of our chartered financial advisers to find out how we can help.

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The Financial Conduct Authority (FCA) does not regulate cash flow planning, estate planning, tax or trust advice.

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.