Naz Financial

A Personal Financial Blog from Naz Miller


For many professionals in the UK, navigating the complexities of the tax system can be daunting. One particularly tough issue is the so-called “62% tax trap”, a phenomenon that can significantly affect your income. Understanding what this tax trap is, how it arises, and how you can potentially avoid it legally, is essential for effective financial planning.

What is the 62% Tax Trap?

The 62% tax trap refers to an effective marginal tax rate that hits certain earners in the UK, particularly those whose income falls between £100,000 and £125,140. This high effective tax rate occurs due to the phased withdrawal of the personal allowance – the amount of income that you do not have to pay tax on – which is £12,570 for the tax year 2023/24.

For every £2 earned above £100,000, £1 of personal allowance is lost. This withdrawal means that for each pound earned between £100,000 and £125,140, you are effectively taxed at 62%. This is because you not only pay the 40% higher rate income tax but also lose the personal allowance, resulting in an additional tax of 20% on this lost allowance.

Before continuing, it’s worth noting that Scotland has different tax bands

The Mechanics Behind the Trap

Here’s a breakdown of how the effective 62% tax rate is calculated:

  1. Income Tax: For income over £100,000, you pay the higher rate of 40%.
  2. Loss of Personal Allowance: For every £2 over £100,000, you lose £1 of your personal allowance, which equates to an additional 20% tax on this lost allowance.

When including National Insurance contributions, the effective tax rate can exceed 60%, commonly referred to as the 62% tax trap.

The key thing to remember her is that it’s not your gross salary that drives this, it’s ‘adjusted net income’, according to HMRC.

Strategies to Avoid the 62% Tax Trap

Avoiding or mitigating the 62% tax trap involves strategic planning and utilisation of available allowances and reliefs, so that your adjusted net income falls blow £100k. Here are some effective strategies:

1. Pension Contributions

Making contributions to your pension is a highly effective way to reduce your taxable income. Contributions to a pension scheme can bring your adjusted net income below the £100,000 threshold, thereby preserving your personal allowance and reducing your tax liability.

What’s more, as a higher rate taxpayer you can also reclaim a further 20% tax relief via completing a self-assessment tax return or contacting HMRC directly. This means a ‘gross’ contribution of £20,000 will effectively only ‘cost’ you £12,000, before we factor in the Personal Allowance reduction being reversed, which provides a further tax saving of £4,000. This gives a ‘cost’ of £8,000 for a personal contribution of £20,000 in total, a massive £12,000 tax saving. 

This is especially true when you use a salary sacrifice scheme (see 3, below).

2. Gift Aid Donations

Charitable donations made under Gift Aid can also help to reduce your taxable income. The donations increase your basic and higher rate tax bands by the gross donation, effectively reducing the income on which you lose your personal allowance.

3. Salary Sacrifice Schemes

Opting for salary sacrifice schemes, where you exchange part of your salary for non-cash benefits such as additional pension contributions, can reduce your taxable income. This method not only lowers your income tax liability but can also provide National Insurance savings for both you and your employer.

Even your car allowance can be put into a salary sacrifice scheme, and thus maybe save you losing tax allowances.

See my other blog post on this topic of salary sacrifice.


4. Investments

Investing in tax-efficient products such as Individual Savings Accounts (ISAs) or Venture Capital Trusts (VCTs) can offer tax-free growth and income, thereby reducing your overall taxable income.

5. Deferring Income

If possible, consider deferring income to a future tax year. This is particularly relevant if you anticipate your income to drop below £100,000 in the future, helping you avoid the personal allowance withdrawal in the current tax year.

6. Utilise Spousal Allowances

If you are married or in a civil partnership, transferring income or assets to your spouse can be beneficial, especially if they are in a lower tax bracket. This can help optimise the use of personal allowances and tax bands within the family unit.


The 62% tax trap is a significant consideration for high earners in the UK, potentially reducing take-home pay substantially. However, with careful planning and strategic use of tax reliefs and allowances, it is possible to mitigate its effects. Consulting with a financial advisor can provide tailored advice to navigate these complexities effectively, ensuring that you make the most of your hard-earned income.

Remember, proactive financial planning is key to avoiding unnecessary tax burdens and maximising your financial wellbeing. Tax can be complicated, and you should seek professional assistance where possible. Contact me to discuss this further.

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Naz Miller

I'm Naz and I'm a Financial Adviser. Prior to working in private practice, I spent 34 years working at Lloyds Bank in Cambridge and surrounding areas. My work has always focused on helping clients achieve their long-term financial objectives.

Glossary of Personal Financial Terms

AAA Rating

In short, AAA ratings (‘triple-A‘ ratings) are the highest credit rating available for an investment, such as a bond or company.

AAA ratings are issued to investment-grade debt that has a high level of creditworthiness with the strongest capacity to repay investors.

Similarly, the AA+ rating is issued by S&P (Standard and Poor) and is similar to the Aa1 rating issued by Moody’s. It comes with very low credit risk and indicates the issuer has a strong capacity to repay.