Earn £110,000? Here’s How to Avoid Paying the 60% Tax Trap Legally

Earning £110,000 a year may sound like a financial milestone, but in the UK tax system, it places you in a tricky position where you could end up paying an effective tax rate of 60% on part of your income. Fortunately, there are legal ways to reduce your tax bill and avoid unnecessary higher-rate taxes.

This article explores practical tax-saving strategies, including pension contributions, salary sacrifice, charitable donations, and tax-efficient investments, to help you maximize your take-home pay.

Understanding the 60% Tax Trap

The UK Personal Allowance—the amount of income you can earn tax-free—is £12,570. However, once your income exceeds £100,000, your allowance is gradually reduced by £1 for every £2 earned above this threshold.

By the time you reach an income of £125,140, you lose the entire Personal Allowance. This results in an effective marginal tax rate of 60% on income between £100,000 and £125,140, making it one of the highest effective tax rates in the UK.

1. Increase Your Pension Contributions

One of the best ways to reduce your taxable income is by increasing your pension contributions.

• Contributions to pension schemes are tax-deductible, meaning they lower your adjusted net income.
• If you contribute £10,000 to your pension, your taxable income drops to £100,000, allowing you to retain your full Personal Allowance.
• The government tops up pension contributions with tax relief at your highest marginal rate.

This is particularly beneficial for higher-rate taxpayers, as contributions receive 40% tax relief.

2. Utilize Salary Sacrifice Schemes

Salary sacrifice allows employees to exchange part of their salary for non-cash benefits, reducing their taxable income. Common salary sacrifice options include:

• Pension contributions (enhancing retirement savings while reducing tax and National Insurance contributions).
• Company car schemes (especially low-emission vehicles).
• Cycle-to-work schemes (offering tax-free savings on bikes and equipment).
• Childcare vouchers (reducing childcare costs for working parents).

Salary sacrifice is particularly effective because it also reduces National Insurance contributions for both the employee and the employer.

3. Make Charitable Donations via Gift Aid

If you regularly donate to charity, ensure you use Gift Aid, which allows charities to claim back 25% extra from the government. As a higher-rate taxpayer, you can:

• Claim tax relief on charitable donations, reducing your adjusted net income.
• Reduce your overall tax bill by claiming back the difference between the basic rate (20%) and the higher rate (40%) on your donation.

For example, if you donate £1,000 to charity, you can claim back £250 through your tax return.

4. Invest in Tax-Efficient Schemes

Certain government-backed investment schemes offer substantial tax reliefs, such as:

• Enterprise Investment Scheme (EIS): Offers 30% income tax relief on investments up to £1 million and exempts capital gains tax after three years.
• Venture Capital Trusts (VCTs): Provide 30% tax relief on investments up to £200,000 per year, with tax-free dividends.
• Seed Enterprise Investment Scheme (SEIS): Grants 50% income tax relief and capital gains tax relief for startups.

These schemes can be riskier but are excellent options for high earners looking to diversify investments while lowering their tax liability.

5. Maximize Your ISA Allowance

Individual Savings Accounts (ISAs) allow you to save or invest up to £20,000 per year tax-free.

• Any interest, dividends, or capital gains earned in an ISA are free from income tax.
• While ISAs do not reduce taxable income, they protect future earnings from tax, making them an essential part of long-term tax planning.

Example Scenario: Saving Thousands in Tax

Consider an individual earning £110,000:

• Without tax planning, they lose £5,000 of their Personal Allowance and face higher tax liabilities.
• By contributing £10,000 to their pension, their taxable income is reduced to £100,000, restoring the full Personal Allowance.
• This results in a total tax saving of up to £2,500, alongside boosted retirement savings.

Final Thoughts

If you earn £110,000 or more, smart financial planning can help you legally lower your tax bill. Strategies such as pension contributions, salary sacrifice, charitable giving, and tax-efficient investments can make a significant difference in how much tax you pay.

Taking proactive steps now can maximize your take-home income, protect your wealth, and secure your financial future.

This article has been carefully fact-checked by our editorial team to ensure accuracy and eliminate any misleading information. We are committed to maintaining the highest standards of integrity in our content.