If you earn over £100,000, HMRC applies one of the highest effective tax rates in the system, and it’s catching more people every year as wages rise. It’s known as the 60% tax trap, and if you’ve got young children, it can be even more costly, because it doesn’t stop at income tax.
In this guide, I’ll show you exactly how the trap works, what it actually costs a family with children in nursery, and what you can do about it if your adjusted net income is over £100,000
What is the 60% tax trap?
The most well-known allowance you lose is your personal allowance: the amount you can earn before paying any income tax at all. That’s currently the first £12,570 of your income, tax-free.
Once your income goes over £100,000, you start losing that allowance. For every £2 you earn above £100,000, you lose £1 of it, so by the time you reach £125,140 you’ve lost it completely.
Here’s why that gets you to 60%. Say you earn an extra £2 in this band. That £2 is taxed at 40%, the higher rate. But because you’ve earned it, you’ve also lost £1 of your previously tax-free personal allowance, and that £1 becomes taxable too, at the same 40% rate. So really, for every £2 you earn, £3 becomes taxable at 40%. Work that through, and you’re paying £1.20 of tax on every £2 you earn. That’s an effective rate of 60%. Add National Insurance on top, and it comes to 62%.
It’s worth being clear that this only applies within the band itself. Once your income passes £125,140, your personal allowance is gone completely, and the marginal rate on income above that drops back down to the standard 45% (47% with National Insurance).
The childcare cliff-edge
If you’re a parent of young children, or about to be, there’s a second consideration layered on top, and this one isn’t a taper, it’s a cliff edge. Go even £1 over £100,000 and you lose certain childcare support immediately, these are certain funded childcare hours and the tax-free childcare scheme:
Funded childcare hours. Working parents can get 30 hours a week of funded childcare during term time (38 weeks a year) for children from nine months to four years old. All three- and four-year-olds get 15 of those hours regardless of income. It’s the extra 15 hours, and the entire entitlement for under-threes, that depends on staying under the £100,000 adjusted net income mark.
Tax-Free Childcare. For every £8 you pay into a dedicated childcare account, the government adds £2, up to £2,000 a year per child, which you can use for nurseries, childminders, and breakfast or after-school clubs. Go over £100,000 and you lose eligibility for this too.
There’s a small buffer if your income creeps over unexpectedly: if you’re already receiving funded hours, you typically get one further term before the entitlement stops.
It’s also worth understanding exactly what’s tested. It isn’t your income to date. It’s what you expect to earn across the whole current tax year, and you re-declare that estimate every three months. If your circumstances change partway through the year, such as a pay rise or a bonus, you need to update the estimate, because it’s assessed on the full year, not just what’s already landed in your account.
What counts towards contributing to your adjusted net income
This is based on your adjusted net income, which HMRC tests against, not just your salary. That means the following all increase your adjusted net income:
- Your salary, any bonus or vested shares such as RSUs (Restricted Stock Units)
- Self-employment or partnership profits, if you run a business alongside your job or instead of it
- Rental income, if you have a property
- Savings interest and dividends
- Pension income you’re already drawing, including the State Pension, if you’re still working while also taking a pension
- Trust income and most foreign income
- Benefits in kind: things like a company car, private medical insurance, or an interest-free loan from your employer, all of which have a taxable value added to your income
- Chargeable gains from investment bonds or life insurance policies, one that catches a lot of people out, since it’s easy to forget a bond withdrawal counts as income at all
A Family Example: Tom & Aisha
Tom and Aisha have two children: Freya, who’s one, and Alfie, who’s three. Both are in nursery full-time, five days a week. Aisha earns £45,000. Tom, after a recent pay rise, has seen his adjusted net income move from £95,000 to just over £100,000.
A full-time nursery place costs an average of £74 a day for Freya and £66 a day for Alfie. While Tom was under £100,000, both qualified for 30 funded hours a week, bringing the daily cost down to £30 for Freya and around £27 for Alfie.
Once Tom’s income crossed £100,000:
- Freya, at one, lost her 30 funded hours entirely. Her nursery place jumped back to the full £74 a day.
- Alfie, at three, kept his 15 universal hours, but lost the extra 15 that took him to 30. His place jumped back to £66 a day.
Between the two of them, that’s an extra £85 a day in nursery fees. Over term time alone, that adds up to more than £16,000 a year. Add in the lost Tax-Free Childcare, worth up to £2,000 per child, and the family’s childcare costs rise by roughly £20,000 a year.
Now compare that to what Tom actually gained from his £10,000 pay rise. Once you factor in the extra tax and National Insurance: the first £5,000 taxed at the normal higher rate, and the second £5,000 taxed at the 60%+ rate, his take-home pay only goes up by about £4,800.
Put the two together, and the family is roughly £15,000 a year worse off than before Tom’s pay rise.
What can you (and Tom) do about it?
Everything here comes back to your adjusted net income. I’ve covered what adds to it, but there are ways of reducing it too.
Pension contributions
The most popular option to reduce your adjusted net income is pension contributions, whether through your workplace pension or a personal pension you set up yourself.
| Potential Routes | How it works |
| Salary sacrifice (if your workplace pension offers this) | You give up part of your salary before it reaches you, in exchange for a bigger employer pension contribution. This also saves National Insurance for both you and your employer. |
| Net pay (workplace pension) | Your contribution comes out of pay before tax is calculated, so you get income tax relief automatically, but not the National Insurance saving that salary sacrifice offers. |
| Personal contribution after tax (through a private pension or workplace pension) | You pay into your pension after tax, and basic-rate relief is claimed automatically by the pension provider. Higher-rate relief and above can be claimed separately via the government online portal or self-assessment tax form. Unlike the other two routes, it doesn’t need to be arranged through your employer. |
How salary sacrifice and net pay compare
Salary sacrifice and net pay work similarly in practice. You’re giving up income before it reaches you, in exchange for it going into your pension instead. With salary sacrifice specifically, because that salary never technically reaches you, you also save National Insurance on it, and so does your employer. Many employers pass some of that saving back to you.
However, from April 2029, the National Insurance exemption on salary sacrifice pension contributions is due to be capped at £2,000 a year. It won’t affect the income tax side, but the NI saving above that threshold will be limited.
Why workplace pensions can catch you out on timing
One limitation of workplace pensions is that they normally need to be set up in advance, and you might only get one or two points in the year to change your contribution rate. That catches a lot of people out. You may have sacrificed what you thought was enough, only for a larger-than-expected bonus to land in February or March, or for shares (RSUs) to vest for more than you’d planned.
Suddenly your income has crept over £100,000, often late in the tax year, leaving very little time to act before 5 April. Salary sacrifice works well if your income is fairly predictable. On its own, it might not be enough to guarantee you land under £100k.
Topping up with a personal pension contribution
That’s where a personal pension contribution, made after tax, becomes useful.
Take Tom, his adjusted net income is just under £105,000. To bring it under £100,000, he could make a gross pension contribution of £5,000. Because pension contributions get basic-rate relief added automatically, Tom only needs to pay in £4,000 and his provider claims the other £1,000 from HMRC. However as Tom is a higher rate tax payer and on that income he started to lose his personal allowance, he’s entitled to more relief than the basic rate already applied. In this case as the contribution has an effective rate of 60%, he’s entitled to an extra £2,000, claimed back via self-assessment or the government portal.
If you’re doing this specifically to protect your childcare entitlement, remember your reconfirmation is based on your expected income for the year, so you can factor in a planned contribution. But it only actually counts once the money’s gone in. Make sure it’s genuinely paid before 5 April, not just planned, or HMRC can claim back any childcare support you received in the meantime.
The trade-off worth weighing up
You can’t touch pension money until your normal minimum pension age, currently 55, moving to 57 in 2028. If you’re in your thirties, that could be 20 years or more before you can access it. I regularly see clients whose long-term pension planning looks excellent on paper, but whose short-term plans, such as a bigger home or university costs, suddenly have less available cash because so much has gone into a pension they can’t touch. If you’ve got young children in nursery, the maths here often makes the decision an easy one, because the alternative is losing thousands in childcare support. If that doesn’t apply to you, locking the money away might not be right for everyone.
Charitable giving
Charitable giving works in a similar way to pension contributions. If you donate and tick the Gift Aid box, that donation reduces your adjusted net income. One thing most people don’t know: a National Trust membership counts as a charitable donation, since the National Trust is a registered charity. An individual annual membership is around £100, not much on its own, but a lifetime membership, at around £2,000, could make a meaningful dent in your adjusted net income in the year you pay for it.
Other salary sacrifice benefits
Pensions aren’t the only thing you can sacrifice salary for. Many employers also offer schemes like an electric car or cycle to work. The same principle applies: you give up part of your salary before it reaches you, so your headline salary, and your adjusted net income, are both lower.
Transferring assets (for spouses only)
Childcare support is tested on each parent individually, not combined household income. If one of you is close to £100,000 and the other has plenty of headroom, it’s worth looking at where your savings and investments actually sit. Assets can normally be transferred between spouses with no tax to pay, so moving savings or dividend-paying shares into the lower earner’s name means future interest and dividends count towards their income instead of yours. Do bear in mind this only applies if you’re married or in a civil partnership, since unmarried couples don’t get the same tax-free transfer.
Holding future savings inside an ISA is worth considering too, since interest and dividends earned inside an ISA don’t count towards adjusted net income at all.
Targeting certain years
If your income sits well above £100,000, rather than just a little over it, fully escaping the 60% tax trap every year can be difficult. One option worth considering instead is targeting specific years. Accept the tax hit in some years and keep more of the extra income accessible, then in other years make a larger pension contribution to bring your income fully back under £100,000 for that year, rather than only ever making a small dent in it.
However keep in mind, there’s a limit on how much you can pay in and still get tax relief. The standard annual allowance is £60,000 a year, or 100% of your relevant UK earnings if that’s lower, and carry forward lets you add any unused allowance from the previous three tax years on top of the current year. Also, if your income is very high, this can taper down further too: once your threshold income is over £200,000 and your adjusted income is over £260,000, the £60,000 allowance starts reducing, down to a minimum of £10,000 for the highest earners.
Quick recap: working out your adjusted net income
Add up everything covered earlier that counts towards your adjusted net income. Then take off things like pension contributions, Gift Aid donations, and other salary sacrifice arrangements.
With pensions, if your contribution came out through salary sacrifice or a net pay workplace pension, it’s already excluded, since that money never counted as part of your income to begin with. But if you made a personal contribution after tax, you deduct the grossed-up amount, not just what you actually paid in, so a £4,000 payment that gets topped up to £5,000 by basic-rate relief counts as a £5,000 deduction. The same grossing-up applies to Gift Aid: a £100 donation counts as £125 off your adjusted net income.
What’s left is the figure HMRC actually tests against, for both the personal allowance taper and your childcare entitlement.
FAQ
What is the 60% tax trap? It’s the effective tax rate created when your personal allowance is gradually withdrawn between £100,000 and £125,140 of income. For every £2 earned in this band, you lose £1 of tax-free allowance, pushing the effective rate on that income to 60% (62% with National Insurance).
Does the childcare cliff-edge apply to household income or individual income? Individual income. It’s tested on each parent separately, not combined. That means two parents each earning £99,000, £198,000 between them, would still qualify, while a couple where one parent earns £100,001 and the other earns just £1 would not, even though their combined income is far lower.
What happens if my income goes over £100,000 unexpectedly? If you’re already receiving funded childcare hours, you typically get one further term before that entitlement stops. Childcare eligibility is reassessed against your expected income for the full tax year, re-declared every three months, so it’s worth updating your estimate as soon as your circumstances change.
Can a pension contribution fix this after the tax year has already started? Yes. A personal pension contribution, made after tax, can be paid in at short notice to bring your adjusted net income back under £100,000, as long as it’s actually paid in, not just planned, before 5 April.
This is general information only and shouldn’t be taken as personal financial advice. Adjusted net income, the 60% tax trap and childcare entitlement all depend on your individual circumstances, so if you think this might affect you, it’s worth getting your position properly checked or speaking to an independent financial adviser.
