For many successful professionals in the UK, reaching an income of over £100,000 feels like a major milestone. However, what many don’t realise is that it also marks the entry into one of the most punishing and confusing parts of the UK tax system—the “66% tax trap.”
This isn’t just a financial quirk; it’s a significant barrier that can make a pay rise or bonus feel far less rewarding than it should. At Abacus Advice, our philosophy is built on delivering “Clarity. Strategy. Peace of Mind.”, and understanding this trap is the first step towards achieving that.
What is the 66% Tax Trap?
The issue arises because for every £2 you earn above £100,000, your tax-free Personal Allowance is reduced by £1. This means by the time your income reaches £125,140, your entire Personal Allowance is gone.
The combination of paying 40% income tax on your new earnings, losing your tax-free allowance, and paying tax on income that was previously tax-free creates an effective marginal tax rate of 60% or more. For many, this feels like a 66% tax rate due to National Insurance contributions. This is a specific pain point for senior professionals who are often overwhelmed by tax and pension complexity.
How It Works: A Clear Tax Trap Example
- Imagine you receive a £10,000 pay rise, taking your salary from £100,000 to £110,000.
- Your £10,000 of new earnings will be taxed at the 40% Higher Rate = £4,000
- Because your earnings are £10,000 over the threshold, your Personal Allowance is reduced by half (£10,000 / 2) = £5,000.
- You now have to pay 40% tax on this £5,000 of previously tax-free income = £2,000
- The total tax on your £10,000 raise is £4,000 + £2,000 = £6,000.
Your take-home pay from a £10,000 raise is only £4,000. This is the financial complexity that our service is designed to solve for our clients.
It’s Not Just About Tax—It’s About Strategy
While the numbers are stark, this situation is not unavoidable.
The most effective way to mitigate the 66% tax trap is through strategic pension contributions. By contributing to your pension, you can effectively reduce your “adjusted net income,” allowing you to reclaim your Personal Allowance while simultaneously building your retirement fund.
This turns a tax problem into a wealth-building opportunity.
Take Control of Your Financial Future
If you are a senior professional feeling the impact of this tax trap, you don’t have to navigate it alone. Our process begins with a
Complimentary Digital Discovery Blueprint session , a no-obligation meeting to assess your situation and explore a clear path forward.
Contact us today to book your session and turn tax complexity into financial clarity.
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