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The £100k–£125k Tax Trap: How to Escape the 60% Effective Rate in 2026/27
If your income falls between £100,000 and £125,140, you’re paying an effective marginal tax rate of 60% or more on every pound in that band. That’s not a mistake — it’s how the personal allowance taper works. For every £2 you earn over £100,000, you lose £1 of your £12,570 personal allowance. By £125,140, it’s gone entirely. The “hidden” tax on the £25,140 in that band is £5,028 — on top of the 40% you’re already paying.
The good news: this is one of the most fixable problems in UK tax. Employer pension contributions from your limited company can bring your adjusted net income below £100,000 and give you the full allowance back.
See your effective tax rate at every income level →
How the 60% trap works
The personal allowance gives everyone the first £12,570 of income tax-free. But once your “adjusted net income” exceeds £100,000, HMRC claws it back at a rate of £1 for every £2 earned above the threshold.
| Adjusted net income | Personal allowance | Allowance lost |
|---|---|---|
| £100,000 | £12,570 | £0 |
| £105,000 | £10,070 | £2,500 |
| £110,000 | £7,570 | £5,000 |
| £115,000 | £5,070 | £7,500 |
| £120,000 | £2,570 | £10,000 |
| £125,140 | £0 | £12,570 |
The income that used to be sheltered by the personal allowance is now taxed at 40%. That’s an extra 20% on top of the 40% you’re already paying on income in the higher-rate band — giving you a 60% effective marginal rate. If you’re inside IR35 on PAYE, add 2% employee NI above the upper earnings limit and it’s 62%.
On the full £25,140 in the taper zone, the personal allowance loss costs you £5,028 in additional tax. That’s money you’d keep if your income were £100,000 or £125,141 — but not if it falls in between.
Which contractors are caught?
Limited company directors (outside IR35)
If you take the standard £12,570 salary plus dividends, your adjusted net income is your salary plus your dividends. At a £600/day rate (£139,200 gross), your total income is roughly £108,500 — well inside the trap. At £500/day (£116,000 gross), total income is about £91,500, so you’re just below the threshold.
| Day rate | Gross | Total income (salary + dividends) | In the trap? |
|---|---|---|---|
| £500/day | £116,000 | ~£91,500 | No |
| £550/day | £127,600 | ~£99,800 | Borderline |
| £600/day | £139,200 | ~£108,500 | Yes |
| £700/day | £162,400 | ~£125,500 | Fully tapered |
| £750/day | £174,000 | ~£134,000 | Past the trap |
Contractors at £550–£700/day have the most to gain from active tax planning here. Below £550/day, you’re likely clear. Above £700/day, the allowance is fully gone regardless — the damage is done, but it’s a fixed cost rather than a marginal rate issue.
Inside IR35 contractors
Inside IR35, your entire fee (minus the 5% expense allowance and employer NI) is taxed as PAYE income. At £500/day, your taxable income is around £94,400 — close but under. At £550/day, you’re at roughly £103,500 and squarely in the trap. At £600/day, taxable income hits about £113,000 and the taper costs you over £2,500.
Anyone with multiple income sources
Even if your contracting income is below £100,000, rental income, a partner’s business, or investment income can push you over. Adjusted net income includes all taxable income — not just employment or dividend income.
The fix: employer pension contributions
For limited company directors, the most powerful solution is employer pension contributions paid directly from your company into your pension. These contributions:
- Reduce your adjusted net income — they’re deducted before the taper test
- Are Corporation Tax deductible — saving 19–25% in Corp Tax
- Carry no National Insurance — no employer or employee NI
- Don’t count as personal income — they don’t appear on your Self Assessment
The annual pension allowance is £60,000 in 2026/27, with up to three years of unused allowance available for carry-forward.
Worked example: £600/day contractor
Without pension contributions:
| Amount | |
|---|---|
| Gross income (£600 × 232 days) | £139,200 |
| Salary | £12,570 |
| Employer NI | £1,136 |
| Company profit | £125,495 |
| Corporation Tax (marginal relief) | ~£29,500 |
| Dividends available | ~£95,990 |
| Adjusted net income | ~£108,560 |
| Personal allowance (tapered) | ~£8,290 |
| Income tax on salary (lost allowance) | ~£856 |
| Extra tax from taper | ~£1,712 |
With £10,000 employer pension contribution:
| Amount | |
|---|---|
| Company profit (after salary, NI, and pension) | £115,495 |
| Corporation Tax (marginal relief) | ~£26,600 |
| Dividends available | ~£88,895 |
| Adjusted net income | ~£101,465 |
| Personal allowance (tapered) | ~£11,838 |
| Extra tax from taper | ~£293 |
The £10,000 pension contribution saves roughly £1,400 in personal allowance taper tax, plus around £2,300 in Corporation Tax, plus the dividend tax you’d have paid on that £10,000 if extracted as dividends. Total tax saving: approximately £5,500 on a £10,000 contribution. That’s a 55% effective tax relief.
To bring adjusted net income fully below £100,000, this contractor would need employer pension contributions of roughly £10,000–£12,000 — a relatively modest amount that saves over £5,000 in tax.
Model your exact pension savings →
Other strategies to reduce adjusted net income
Gift Aid donations
Charitable donations made via Gift Aid extend your basic rate band and reduce your adjusted net income. If you donate £5,000, your adjusted net income drops by £5,000 and your basic rate band extends by £5,000. Genuine charitable giving is tax-efficient in the taper zone, but don’t donate purely for the tax break — you’re still giving away more than you save.
Trading losses
If your company makes a loss in a given year, or if you have self-employment losses, these can reduce your adjusted net income. This is situational rather than a strategy you’d deliberately create.
Timing of dividends
If you’re close to £100,000, you can time dividend declarations to fall in a tax year where your other income is lower. This is particularly relevant if your income fluctuates — for example, between contracts or if you’re taking unpaid leave.
The trap within the trap: High Income Child Benefit Charge
If you have children and claim child benefit, the High Income Child Benefit Charge kicks in at £60,000 adjusted net income. You repay 1% of your child benefit for every £200 over £60,000. By £80,000, you’ve repaid it all. This is a separate issue from the £100k taper, but employer pension contributions fix both — reducing your adjusted net income below £60,000 eliminates the HICBC entirely.
Calculate your child benefit position →
How is this calculated?
The 60% effective rate comes from the interaction between the 40% higher-rate income tax and the personal allowance taper. The taper removes £1 of allowance for every £2 of income above £100,000 (Income Tax Act 2007, s.35). The lost allowance was previously taxed at 0% and is now taxed at 40%, creating an additional 20% effective rate on top of the 40% higher rate. For PAYE income, 2% employee NI above the upper earnings limit (£50,270) adds further.
Pension annual allowance rules are set by HMRC under the Finance Act 2004, s.228. The standard annual allowance is £60,000 for 2026/27. Employer contributions must satisfy the “wholly and exclusively” test to be Corporation Tax deductible, but regular pension funding for a working director meets this test in virtually all cases.
Frequently asked questions
What exactly is the 60% tax trap?
When your income is between £100,000 and £125,140, you lose £1 of your £12,570 personal allowance for every £2 earned. This means the tax on each additional pound is 40% (the higher rate) plus an effective 20% (from the lost allowance that was shielding income from tax) — totalling 60%. For PAYE workers, add 2% employee NI for a 62% marginal rate. It’s not a separate tax — it’s the interaction between two existing rules.
Does the 60% trap affect dividends?
Yes. Dividends count toward your adjusted net income, so they can trigger the personal allowance taper. However, the marginal rate on dividends in the taper zone is different from PAYE income. The lost personal allowance is taxed at 40% (income tax on salary that’s no longer sheltered), but the dividend itself is taxed at 35.75% (higher rate). The combined effect is still extremely expensive — which is why pension contributions to reduce your income below £100,000 are so valuable.
How much do I need to contribute to my pension to escape the trap?
Enough to bring your adjusted net income below £100,000. For a £600/day contractor, that’s roughly £10,000–£12,000 in employer pension contributions. For a £700/day contractor, it could be £25,000–£30,000. Use the Salary Sacrifice Calculator to model your exact number. Remember, you can contribute up to £60,000 per year (plus unused allowance from the previous three years).
Does salary sacrifice work for limited company directors?
Technically, “salary sacrifice” applies to employees giving up salary in exchange for a pension contribution. As a limited company director, you achieve the same outcome by simply making employer pension contributions from your company. The tax effect is identical — the contribution reduces your company’s taxable profit and doesn’t count as your personal income. The Salary Sacrifice Calculator models both scenarios.
What if I’m already past £125,140 — should I still care?
Once your income exceeds £125,140, your personal allowance is already fully tapered to £0. You’re paying 40% (or 45% above £125,140) on all additional income, but you’re no longer in the 60% zone. The taper has already done its damage — it’s a fixed £5,028 cost. Pension contributions are still highly tax-efficient at this level, but the “escape the trap” strategy specifically benefits those who can bring their income below £100,000.
Earning between £100k and £125k? Don’t leave £5,000+ on the table. Use our free Marginal Rate Calculator to see your effective tax rate at every income level, then model the pension contribution that brings you below the threshold with the Salary Sacrifice Calculator.