More than half of higher earners would consider shunning a pay rise for tax reasons

More than half of those earning £100,000 or more would consider turning down, deferring or restructuring a pay rise if the increase meant they would have to pay more tax, findings show. 

RBC Wealth Management surveyed 750 Henrys, which stands for 'High earners, not rich yet' - a term used to describe people who earn £100,000 or more but do not have large amounts of money in savings or investments.

This is partly due to factors like high housing and childcare costs, student loans and spending on an aspirational lifestyle. 

As well as considering turning down a pay rise, forty-six per cent of Henrys said they were putting more money into their pension to reduce their taxable income. 

Income tax thresholds in Britain have been frozen since April 2021, meaning more people are pulled into the higher (40 per cent) or additional (45 per cent) rate tax bands when they get a pay rise. 

Those earning £50,270 start paying 40 per cent tax on any income above that level. Once their income exceeds £125,140, they pay 45 per cent on anything above that. 

But due to an obscure quirk of Britain’s tax regime, those earning between £100,000 and £125,140 per year are subject to a 60 per cent tax rate on a slice of their income - as we explain below. 

In 2025, Rachel Reeves kept income tax thresholds frozen until 2030-31. It is unlikely John Healey will change this in the Budget on Wednesday. 

No thanks: Fifty-five per cent of higher earners said they would consider turning down a pay rise for tax reasons 

This means an increasing number of people will, after seeing their pay increase, be dragged into a higher income tax band. 

According to RBC, 71 per cent of Henrys are concerned about John Healey's Budget next week, particularly when it comes to tax hikes and the continuation of frozen income tax thresholds. 

Some 79 per cent of Henrys in RBC's survey agreed with the statement, 'I’m earning more than ever, but I feel less well off.'

When asked how they would cope with an unexpected bill of between £2,000 and £5,000, 48 per cent of Henrys surveyed said they could not draw on savings and would need to cover it by other means such as a loan, help from family or friends, selling investments or requesting a salary advance.

RBC said: 'The findings shine a light on the financial reality of those who earn over £100,000 a year but have limited savings and assets. 

'With this group of earners highlighting concerns around pay rises triggering a 'cliff edge' tax rate, and many only holding limited savings to cover any unexpected costs.'

What is the 60% tax trap? 

Officially, Britain's top rate of income tax is 45 per cent. But there is, in effect, a 60 per cent tax band between £100,000 and £125,140. So, for every extra £1 you earn within that band, you will keep 40p after income tax. 

Once you earn £100,000 or more a year, each extra pound of income results in the loss of 50p of your tax-free personal allowance, which is the first £12,570 of your income. 

The £12,570 tax-free personal allowance is removed at a rate of £1 for every extra £2 earned above £100,000, until it is entirely gone at £125,140. 

But taking £1 of tax-free allowance away for every £2 of extra income bumps up the 40 per cent higher rate in that bracket by half, creating a 60 per cent income tax rate instead. 

At this level of income, people also face the abrupt withdrawal of childcare benefits, which, in some cases, can be worth tens of thousands of pounds a year. 

In England it is at £100,000 a year that working parents lose their entitlement to 30 hours a week of free childcare, for example. 

HM Revenue & Customs has estimated, via a freedom of information request by NFU Mutual, that nearly 1.5million people paid 60 per cent tax through losing some or all their personal allowance in the last tax year. 

When it was introduced in 2010 by former Chancellor Alistair Darling the 60 per cent tax trap was a niche issue. 

However, with the £100,000 threshold remaining frozen through seven Conservative Chancellors and now two in Labour, it is hitting a lot more people. 

Daniel Hough, a director at RBC, said: 'What many people don’t realise is that the £100,000 “cliff edge” isn’t just about losing your personal allowance and facing a 60 per cent marginal income tax rate. 

'It’s also the point where childcare support drops away completely, and for families with multiple young children that can be worth tens of thousands of pounds a year.

'It’s very important to understand your marginal rate and how different tax rules may impact you.'

How to avoid the 60% tax trap 

Making pension contributions is a good way to legally swerve the 60 per cent tax trap. Adding more to your workplace or private pension will bring down your income. 

Richard Evans, an investment and pension specialist at Fidelity, said: 'Paying money into a pension reduces your effective taxable income and, if your pension contributions reduce your adjusted net income to less than £100,000, your personal allowance will be restored in full.'

He added: 'Let’s say you earn £110,000 and want to bring your taxable income back to £100,000 exactly to extricate yourself from the 60 per cent tax band. 

'You might imagine that you have to write a cheque for £10,000 to a pension company but in fact £8,000 will suffice. 

'This is because the pension company will automatically top up your contribution by £2,000, which represents basic-rate tax relief from HMRC. So the amount that ends up in your pension once that tax relief is credited to your account is £10,000.'

To claim back the tax relief on your pension contributions you will need to complete a tax return and send it to HMRC. 

Others bring down their taxable income by signing up to salary sacrifice schemes available through their workplace, such as those for leasing a bike to cycle to work or an electric car. 

However, these benefits will be capped at £2,000 per year from April 2029.  

Another way to avoid the 60 per cent tax trap is to donate to charity, as Gift Aid contributions lower your adjusted net income in the same way as pension contributions. 

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