There is a band of income where you keep 40p of every extra pound — a higher effective rate than a millionaire pays. Most people earning it have no idea it exists. It has a name, a precise shape, and a completely legal way out.
Everyone gets a Personal Allowance — £12,570 of income taxed at 0%. But once your income passes £100,000, HMRC takes that allowance away at £1 for every £2you earn over the line. It's gone completely by £125,140.
So picture earning £1 inside that band. You pay 40% income tax on the pound itself — and you also lose 50p of tax-free allowance, which means 50p that was untaxed is now taxed at 40% too. Add it up and that single pound has cost you 60p. For a whole slice of income between £100,000 and £125,140, your effective marginal rate is 60%.
It is the strangest kink in the UK tax system: a band where earning more, before and after, is taxed harder than being genuinely rich.
The taper is based on adjusted net income, and a personal pension contribution reduces it. Put enough in to bring your adjusted net income back to £100,000, and you buy back the entire Personal Allowance you were losing.
Because you're rescuing income from a 60% band, the effective relief on that contribution is about 60%. And it's not money gone — it's money moved, from a future tax bill into your own pension. You have simply chosen to pay your future self instead of HMRC.
The catch is the detail. The annual allowance, whether you can carry forward unused years, whether you've already touched a pension, whether you're a Scottish taxpayer — each of these changes the answer, and some of them change it a lot. Which is exactly why this is worth ten minutes with someone who does it for a living.
If you're being made redundant and taking early retirement in the same year, this is the most important tax planning you will ever do — and the window is short. A redundancy payment (the first £30,000 tax-free), half a year's salary, and the first slice of pension income can stack up and tip you straight into the 60% band, or waste allowances that don't carry forward.
Handled well — often by routing part of the payment or income into a pension, in the right order — it can save you thousands. We've seen people quoted £1,500 to £2,500 for this and quietly walk away. It shouldn't cost that, and it shouldn't be out of reach. Ask us what it actually takes.
Between £100,000 and £125,140 of income, your £12,570 Personal Allowance is withdrawn at £1 for every £2 you earn over £100,000. So each extra £1 is taxed at 40% and also strips away 50p of tax-free allowance, which is itself then taxed at 40%. The combined effect is an effective marginal rate of 60% on that band of income — higher than the rate paid by someone earning £1 million.
A personal pension contribution reduces your 'adjusted net income' — the figure HMRC uses to taper the allowance. Contribute enough to bring your adjusted net income back down to £100,000 and you recover the whole Personal Allowance. Because you're escaping a 60% band, the effective tax relief on that contribution is around 60% — an unusually high rate of relief. The money is still yours; it's just in your pension rather than with HMRC.
The annual allowance is £60,000 for most people, and you can usually carry forward unused allowance from the previous three tax years. Two big exceptions change this sharply: if your income is very high the allowance tapers down, and if you've already flexibly accessed a pension your allowance may be just £10,000 (the money purchase annual allowance, which can't be carried forward). Both are exactly the situations where you should take advice before acting.
This is one of the highest-stakes years to plan, because several things collide: redundancy pay (the first £30,000 is tax-free), a part-year of salary, and the start of pension income. Get the timing wrong and you can be pushed into the 60% band, or waste allowances that don't carry forward. Get it right — often by directing part of the payment or income into a pension — and you can save a great deal. This is a one-off planning job, and it's worth doing properly.
Taking only your tax-free lump sum does not, by itself, restrict future contributions. But flexibly accessing the taxable part of a money purchase pension triggers the money purchase annual allowance, which caps future contributions at £10,000 a year and removes carry forward. If you're still earning and might want to keep contributing, the order in which you do things matters — which is the sort of thing worth a conversation before, not after.
The Personal Allowance taper is UK-wide, so the trap exists in Scotland too — but Scottish income tax has different rates and bands, so the exact effective rate differs. If you're a Scottish taxpayer, treat any figure you see quoted for the '60% trap' as indicative and get your own position worked out.
If you're near £100,000, or facing a redundancy-and-retirement year, book a free call. No pitch — just a straight read of what your position is and what it's worth doing about it.
Book a free call →General guidance, not advice for your situation — and we're not regulated to give investment advice on which pension to use. The tax planning is ours; the product choice is a conversation with a financial adviser. Last reviewed 13-07-2026.
We checked these rather than relying on memory. Every figure and deadline above comes from HMRC directly — go and read them yourself if you'd like to.
Last reviewed 13-07-2026. Tax rules change — if you're reading this long after that date, check the source.
