The 60% tax trap: what happens when you earn over £100,000
Earn between £100,000 and £125,140 and every extra £1 of income can cost you 60p in tax. Add in lost childcare support and the real cost can be far higher.
Why is there a 60% tax rate?
There's no official 60% band. It happens because your £12,570 Personal Allowance drops by £1 for every £2 of adjusted net income over £100,000. So on an extra £100 you pay £40 higher-rate tax, and lose £50 of allowance, which is then taxed at 40%, costing another £20. That's £60 in total, or £62 once 2% National Insurance is added.
By £125,140 the allowance has gone completely and the effective rate drops back to 45%.
The £100k childcare cliff-edge
If either parent's adjusted net income goes over £100,000, the family loses all 30 hours of funded childcare and up to £2,000 per child per year of Tax-Free Childcare. With two young children in full-time nursery, earning £1 over the limit can cost well over £10,000 a year.
How to avoid the 60% tax trap
The main option is to lower your adjusted net income. You can pay more into your pension through salary sacrifice or personal contributions (which get tax relief), make Gift Aid donations, or use other salary sacrifice schemes such as an electric car. Company directors can also think about the mix of salary and dividends they take.
Our childcare calculator shows how much pension contribution you'd need to get back under £100,000.