Why 60%, when the top rate is 45%?
Between £100,000 and £125,140 of adjusted net income, the £12,570 personal allowance is withdrawn by £1 for every £2 earned. An extra pound of salary is taxed at 40%, and it also drags 50p of previously tax-free allowance into 40% tax. That is 40p plus 20p — 60p of tax on every extra pound, which is why the band is known as the 60% trap even though no 60% rate appears in any HMRC table.
The real figure is usually higher. National Insurance adds 2% above the upper earnings limit, taking it to 62%. A Plan 1, 2, 4 or 5 student loan adds 9% for 71%, and a postgraduate loan adds a further 6% for 77%. On those numbers a £10,000 pay rise can be worth £2,300.
What counts as adjusted net income
The taper is measured against adjusted net income, not gross salary. That means bonuses, taxable benefits such as a company car, rental profit, savings interest and dividends all count. It also means the reliefs that reduce it — personal pension contributions, salary sacrifice and Gift Aid donations — reduce the taper with it.
Why a pension contribution is worth more here than anywhere else
A contribution in this band does two things at once: it reduces the income being taxed at 40%, and it restores the personal allowance the taper had taken away. Both effects are worth 40%, so the effective relief is 60%. Put another way, £20,000 into a pension can cost £8,000 of take-home pay.
Relief at source does not reduce National Insurance or student loan repayments, which are charged on unreduced gross pay. Salary sacrifice does reduce both, so where an employer offers it the effective relief is higher still — a point worth checking before deciding how to contribute.