The marginal tax trap in 2026-27

For the 2026-27 tax year, individuals with income between £100,000 and £125,140 face an effective marginal income tax rate of 60%. This unusually high rate is not a separate tax band but arises because the personal allowance is gradually withdrawn once income exceeds £100,000.

The personal allowance remains £12,570 for 2026-27 and continues to be withdrawn at a rate of £1 for every £2 of income over the threshold. This means that for every £100 earned above £100,000, the taxpayer pays £40 in higher-rate income tax and loses £50 of their tax-free allowance, which costs an additional £20 in tax. The combined effect is a £60 tax charge on that £100 of income—an effective rate of 60%.

Once income reaches £125,140, the personal allowance is reduced to zero. For income above this level, the marginal tax rate drops back down to the additional rate of 45%.

How to mitigate the 60% trap

For those caught in this trap, proactive tax planning can make a significant difference. There are several legitimate ways to reduce your 'adjusted net income' and preserve your personal allowance.

Pension contributions: Making personal pension contributions is one of the most effective ways to mitigate the 60% tax trap. Contributions extend your basic and higher rate tax bands. For example, a £10,000 gross pension contribution effectively reduces your adjusted net income by £10,000, potentially restoring £5,000 of your personal allowance and saving up to £6,000 in income tax.

Charitable donations: Donations made under the Gift Aid scheme work in a similar way to pension contributions. They reduce your adjusted net income, which can help reinstate your personal allowance while supporting a good cause.

Income shifting: If you are married or in a civil partnership, it may be possible to transfer income-producing assets (such as shares or cash savings) to a spouse who earns less than £100,000. This ensures that the income is taxed at their lower marginal rate and helps keep your own income below the £100,000 threshold.

Salary sacrifice: If your employer offers a salary sacrifice scheme, you could agree to give up a portion of your salary in exchange for a non-cash benefit, such as increased employer pension contributions or a low-emission company car. This reduces your taxable income while providing a valuable benefit.

Timing of income: If you have control over when you receive income—for example, if you are a business owner taking dividends or a landlord receiving rent—you might consider delaying or bringing forward income to smooth your earnings across different tax years, keeping your income below £100,000 where possible.

The £100,000 threshold has remained frozen for many years, meaning inflation and wage growth are pushing more individuals into this 60% marginal tax trap. If you expect your income to fall between £100,000 and £125,140 this year, it is well worth reviewing your financial position early to explore the planning opportunities available.