The 60% tax trap
Between £100,000 and £125,140 of taxable income, every extra £2 of pay loses £1 of personal allowance. The extra £1 of taxable income that surfaces is taxed at the higher rate of 40%, on top of the 40% tax on the £2 itself: a combined effective marginal rate of 60%535. Add 2% National Insurance and the slice from a pay rise in this band can be 62%.
Worked examples
| Gross | PA | Tax + NI | Net |
|---|---|---|---|
| £100,000 | £12,570 | £31,443 | £68,557 |
| £110,000 | £7,570 | £37,643 | £72,357 |
| £120,000 | £2,570 | £43,843 | £76,157 |
| £125,140 | £0 | £47,029 | £78,111 |
Across the £25,140 of salary between £100,000 and £125,140, tax and NI rise by £15,586. The net keeps £9,554, an effective marginal rate of 62.0% once NI is included.
Escaping the trap
Pension salary sacrifice reduces the taxable income that determines the taper. A £25,140 salary sacrifice from £125,140 to £100,000 restores the full £12,570 personal allowance, saving £5,028 in income tax (£12,570 × 40%) on top of the £10,056 (£25,140 × 40%) saved on the salary itself.
Does it apply in Scotland?
Yes, and it bites harder. The personal allowance is reserved to Westminster, so the taper applies the same way to Scottish taxpayers, but it layers on top of Scotland's 45% Advanced rate rather than the 40% higher rate used in the rest of the UK. Every extra £2 of pay between £100,000 and £125,140 is taxed at 45% (90p), and the £1 of allowance it withdraws is taxed at 45% too (45p): a combined 67.5% on income tax alone, against 60% south of the border. Add the 2% National Insurance that still applies above £50,270 and a pay rise in this band is taxed at 69.5%14.