Over 500,000 Britons caught in 60% tax trap and pay more than those on higher salaries - how to avoid it

Workers earning between £100,000 an £125,140 fall victim to the tax trap meaning they pay more tax on the next pound they earn than people on higher salaries.

Britons are charged 45 per cent income tax for earnings over £125,140. But, due to inequalities in the tax system, people can pay a marginal tax rate of 60 per cent on earnings between £100,000 and £125,000.

For every £2 someone earns above £100,000, they lose £1 of their £12,570 personal allowance and by the time they earn £125,140, this has fallen to zero.

It means anyone caught in the trap pays 60 per cent in tax on that part of their earnings, plus 2p of additional National Insurance Contributions. Once all the allowance is lost, the tax rate goes back to 45 per cent in every pound.

The number of taxpayers in this tax bracket increased by 23 per cent from 436,000 to 537,000 between 2021-22 and 2022-23, according to a Freedom of Information request.

This figure could be much higher today due to another year of frozen income tax thresholds and soaring inflation.

Parents also risk falling into another tax trap once they earn more than £100,000. Those who earn above this amount can lose their tax-free childcare and half the 30 hours a week of free care that is available for three and four-year-olds.

“It only disincentivises people from working harder, being more productive and ultimately generating economic growth.”

Beating the 60 per cent tax trap

Experts at St James' Palace explain that one of the quickest and simplest ways to bring one's taxable income below the threshold is to pay more into their pension before tax year-end. This is a "win-win", since people reduce their tax bill and boost their retirement fund at the same time.

Those who just made it into the higher tax band can also top up their pension as this can reduce the amount of tax they pay in a number of ways. And any contribution they make reduces their taxable income – so it’s worth paying in as much as they can afford.

A well-timed pension contribution might help people sidestep the higher rate or additional tax band, so they avoid paying more Income Tax.

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Additionally people can push their income back down below one of the tax band thresholds if they receive Child Benefit.

High-income Child Benefit is a tax charge on families where one partner has an adjusted net income of more than £60,000. This is another charge that uses tapering, with an extra one per cent deduction of the amount of Child Benefit for every £100 of income over £60,000.

This is another way how putting money away in one's pension may bring them back down into a lower rate tax band.

A Treasury spokesman said: “We are committed to keeping taxes on working people as low as possible while maintaining fiscal responsibility, that’s why we’ve pledged to not raise income tax, National Insurance or VAT.

“We are a government of wealth creation and believe the best way to responsibly improve living standards is through economic growth by guaranteeing stability, stimulating investment, and reforming our planning and skills systems to unlock Britain’s potential.”