The UK income tax system appears straightforward at first glance. Taxpayers pay 20% in the basic rate band, 40% in the higher rate band and 45% once their income exceeds the additional rate threshold. However, this structure hides a significant anomaly that affects hundreds of thousands of people. Those with income between £100,000 and £125,140 can face a marginal tax rate far higher than the headline 40% or 45% figures suggest. In practice, this band exposes individuals to an effective 60% marginal tax rate.
HMRC data shows that in 2023/24, around 634,000 taxpayers fell into this band. Projections suggest this number could exceed one million by 2027/28, largely because tax thresholds remain frozen. With more people being drawn into this range each year, understanding the mechanics and implications of the 60% rate is increasingly important.
This article explains why the marginal rate reaches 60%, illustrates the effect with clear numbers, and outlines planning strategies that taxpayers can use to reduce the impact.
How the 60% Rate Arises
For the 2025/26 tax year, the personal allowance remains £12,570. This allowance is gradually withdrawn once a person’s adjusted net income (ANI) exceeds £100,000. For every £2 of income above £100,000, £1 of personal allowance is lost. By the time ANI reaches £125,140, the allowance is fully removed.
The combination of paying higher-rate tax and losing tax-free allowance is what creates the 60% marginal rate. Income above £100,000 is therefore taxed twice: once under the higher rate and again through the loss of the personal allowance, which increases the portion of income taxed at higher rates.
Worked Example: Why £1,000 of Extra Income Creates a £600 Tax Bill
Consider a taxpayer whose income increases from £100,000 to £101,000:
- At £100,000, the person still has their full £12,570 personal allowance.
- Once income increases by £1,000, half of that (£500) is removed from their personal allowance because of the £1-for-every-£2 rule.
Two separate tax charges arise:
1. 40% tax on the extra £1,000
£1,000 × 40% = £400
2. 40% tax on the newly taxable £500
£500 × 40% = £200
Total tax on the extra £1,000
£400 + £200 = £600
Effective marginal tax
£600 ÷ £1,000 = 60%
This mechanism applies across the entire income band from £100,000 to £125,140. Anyone whose earnings fall in this range should be aware of the considerable tax impact, particularly where bonuses or irregular income could push them into the charge unexpectedly.
How to Reduce or Remove the 60% Marginal Rate
Although the 60% band is firmly embedded in UK tax legislation, taxpayers can take steps to reduce their exposure. The two most practical and widely used approaches are pension contributions and salary sacrifice arrangements.
Pension Contributions: An Effective Way to Restore the Personal Allowance
Pension contributions reduce adjusted net income for tax purposes. This applies whether contributions are made through a relief-at-source pension scheme or through an occupational scheme using the net pay arrangement.
Lowering adjusted net income towards, or below, the £100,000 threshold can restore part or all of the personal allowance. Since losing the allowance creates the marginal 60% rate, reinstating it effectively reduces the overall tax burden.
Why Pension Contributions Are So Efficient
For every £1 contributed to a pension, 60p can be saved in tax for those in the 60% band. This creates a powerful incentive to consider pensions as part of tax planning, especially for individuals whose income fluctuates or who receive bonuses that could push their income above £100,000.
While this approach does not provide an immediate cash return, the long-term benefit is that funds are redirected into the taxpayer’s own retirement savings rather than lost to additional tax.
Salary Sacrifice: A Direct Way to Reduce Taxable Income and NIC
Salary sacrifice is another method that can help to avoid the 60% band. Under this arrangement, an employee gives up part of their salary in return for a benefit provided by the employer, often a pension contribution. Because the sacrificed salary is never received, it is not included in taxable income or adjusted net income.
Advantages of Salary Sacrifice
- The employee saves income tax on the amount sacrificed.
- The employee also saves National Insurance, generally at 2%.
- The employer saves employer National Insurance, usually at 15%, and sometimes passes part of this saving to the employee.
- The reduction is applied at source, meaning the individual avoids the 60% band immediately.
Salary sacrifice therefore offers both an income tax saving and a National Insurance saving. It can be used to bring adjusted net income below £100,000 and retain the personal allowance.
Potential Change to Salary Sacrifice Caps
At the time of writing, the Autumn Budget 2025 has not taken place. There is speculation that the government may introduce a limit of £2,000 on the amount that can be sacrificed into a pension scheme without National Insurance applying. Above this limit, normal NIC rules would apply. This does not remove the usefulness of salary sacrifice, but it may affect the tax efficiency of larger contributions.
Other Items Commonly Salary Sacrificed
While pension contributions are the most common use of salary sacrifice, other benefits can be included. Examples include:
- Contributions through cycle-to-work schemes
- Leasing electric vehicles
- Certain approved employee benefits
For electric cars in particular, the benefit-in-kind charge remains lower than the cost of private leasing for many individuals. Salary sacrifice for an electric vehicle can reduce adjusted net income, prevent entry into the 60% band and provide the employee with a tax-efficient benefit.
Why Planning Ahead Matters
Understanding how adjusted net income is calculated and tracking your position relative to the £100,000 threshold enables proactive planning. Those who know that their income may approach or exceed this level can take steps in advance, such as arranging pension contributions or discussing salary sacrifice options with their employer before the end of the tax year.
This is particularly important for anyone receiving bonuses, additional payments or fluctuating income that may tip them into the 60% range. With thresholds frozen, increasing numbers of taxpayers are affected each year. Forward planning helps mitigate unnecessary tax exposure and ensures any additional income is used in a way that benefits the individual.
This article is for general information only; seek tailored advice before acting.
