Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
You might think the highest rate of income tax in the UK is 45%. But for many people earning over £100,000, part of their income is effectively taxed at 60% – and in Scotland, even more.
What’s more, many people fall into this trap without realising it. Your basic salary might be below £100,000, but a bonus, pay rise or benefits could quietly push your total income over the line.
The good news is that this tax hit is often avoidable. By making a pension contribution – for example into a Self-Invested Personal Pension (SIPP) – you may be able to reduce your taxable income and avoid the 60% tax rate altogether.
With the tax year ending on 5 April, there is still time to act.
The personal allowance – the key to the 60% tax trap
You normally get a personal allowance. That’s £12,570 of income you don’t pay tax on.
Once your income goes over £100,000, that allowance starts to disappear. This is what creates the so-called 60% tax rate. The effective 60% rate only applies to income between £100,000 and £125,140.
You won’t need to worry if your income is below £100,000, as this will be taxed at the usual rates. And any income above £125,140 is also taxed at the normal top rate. It’s worth noting these figures are for England, Wales and Northern Ireland. In Scotland the effective rate is not 60% but 67.5%.
How losing your allowance creates a 60% tax rate
The 60% tax rate applies for every £1 you earn over £100,000 (for income between £100,000 and £125,140). What happens is you lose 50p of your tax-free allowance.
Here’s a simple example.
On top of income tax, employees also pay 2% National Insurance on income in this range. That means the total deduction from your pay can reach 62% in England, Wales and Northern Ireland and 69.5% in Scotland.
Why this matters even if you earn more than £125,140
Once your income hits £125,140, your personal allowance is fully gone. After that, the tax rate drops back to 45% in England, Wales and Northern Ireland and 48% in Scotland – any income above £125,140 is taxed at this rate.
But the damage is already done. You’ve lost your full personal allowance. And if you’re a parent, you may also lose access to 30 hours of free childcare.
The legal way to avoid the 60% tax
Paying into a pension reduces your taxable income. It’s always helpful to begin saving for later life. But if your pension contributions bring your taxable income below £100,000, you get another benefit – your full personal allowance is essentially restored and the 60% tax disappears.
Let’s take an example:
Say you earn £110,000 and you want to contribute to your pension to bring your taxable income back to £100,000. You only need to contribute £8,000 into your pension. Your pension provider automatically adds £2,000 in basic-rate tax relief. So altogether £10,000 goes into your pension.
Crucially, pension contributions must be made by 5 April to count for the current tax year.
Remember: You’ll need to complete a self-assessment tax return to reclaim the additional tax relief you’re entitled to. HMRC will then refund the extra tax you paid. This method applies to non-workplace pensions.
How ‘carry forward’ can also help
You’re not just limited to this year’s pension allowance. You can also use unused allowances from the previous three tax years.
You can do this if you were a member of a pension scheme in those years and you earn enough in the current tax year to cover the contribution. This can let very high earners reduce taxable income significantly in one year. A quick annual review before the tax year ends can help ensure you’re using all your available allowances.
A warning if you earn a very high income
It’s worth knowing that if your income is very high, your pension allowance may be reduced under the tapered annual allowance rules. In simple terms:
- The taper can apply if income exceeds £260,000
- The allowance reduces gradually
- The minimum allowance is £10,000
The rules are complex, and mistakes can be costly. If this applies to you, it may be worth seeking advice from a qualified financial adviser.
Final thoughts – the deadline is approaching
The 60% tax rate is one of the least understood – and potentially most costly – features of the UK tax system. But for many people, it’s also avoidable, if they act in time.
For those affected, pension contributions can be a powerful way to reduce tax, restore lost allowances and avoid paying more than necessary, while boosting long-term retirement savings at the same time.
If you have pensions spread across different providers, consolidating them into a SIPP could help you take control and put your money to work more effectively. And if you don’t yet have a SIPP, this could be a good time to consider whether one is right for you – especially with the 5 April deadline approaching.
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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Please be aware that past performance is not a reliable indicator of future returns. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). It’s important to understand that pension transfers are a complex area and may not be suitable for everyone. Before going ahead with a pension transfer, we strongly recommend that you undertake a full comparison of the benefits, charges and features offered. To find out what else you should consider before transferring, please read our transfer factsheet. If you are in any doubt whether or not a pension transfer is suitable for your circumstances we strongly recommend that you seek advice from one of Fidelity’s advisers or an authorised financial adviser of your choice. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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