The top rate of income tax is 45%, but depending on your circumstances, you could unknowingly fall into one of the UK’s little-known ‘tax traps’ and end up paying an effective rate as high as 60%.
These traps can strip away your personal tax-free allowance (£12,570), your access to child benefit payments and your free childcare hours once your income passes certain thresholds.
They have come under renewed scrutiny after the Office for Budget Responsibility (OBR) signalled it will carry out further analysis of marginal tax rates and how they affect incentives to work, save and invest.
Here, Which? explains how the main tax traps work and five ways you could avoid triggering them.
- Select Which? as a preferred source on Google so you can see more independent news written by expert Which? journalists.
What are tax traps?
Tax traps occur when allowances or benefits are withdrawn once your income crosses certain levels. Because you lose support as your earnings increase, the effective tax rate on some of your income can be much higher than the headline rate.
Three of the most common traps affect higher earners and parents.
Personal allowance tax trap
Normally, everyone can earn £12,570 tax-free. However, for every £2 you earn over £100,000, you lose £1 of your personal allowance – meaning it will be fully lost at £125,140 of annual earnings.
Earners falling into this trap are effectively taxed at a rate of 60% on the band of earnings between £100,000 and £125,140. That rises to 62% when you factor in National Insurance (NI) on top, and is even higher for graduates paying back student loans (Plan 5 graduates pay back 9% of their income above £25,000).
- Find out more: income tax calculator
Child benefit tax trap
Another trap affects parents through the high-income child benefit charge.
Child benefit currently pays £26.05 a week for the eldest child and £17.25 for each additional child. But if you or your partner earns more than £60,000 a year, you must start paying some of it back through the tax system.
For every £200 earned above £60,000, 1% of the benefit is clawed back. Once income reaches £80,000, you must repay the entire amount.
The repayment is collected through the self-assessment tax system, which means households affected by the charge may need to complete a tax return even if they don’t usually have to.
Even if you expect to repay the benefit, it can still be worth making a claim. Doing so can give you NI credits, which count towards your state pension entitlement.
If you don’t want to receive the payments, you can still complete the claim but opt out of receiving the money.
- Find out more: child benefit rates and calculator
Childcare tax trap
Families can face another cliff edge if either parent’s income exceeds £100,000.
At that point, you lose eligibility for tax-free childcare, which works through an online childcare account. For every £8 you pay in, the government adds £2. This is equivalent to a 25% top-up and is worth up to £2,000 per child each year.
In England, eligible working parents can also access up to 30 hours of funded childcare during term time for children aged from nine months. But once one parent’s income exceeds £100,000, families lose access to tax-free childcare and much of this support.
- Find out more: tax-free childcare and help with childcare costs
5 ways to avoid triggering these traps
In some cases, you may be able to avoid these traps by reducing your adjusted net income, which is the figure used to determine whether you cross key thresholds.
1. Increase your pension contributions
If you’re close to one of these thresholds, you can increase your pension contributions to reduce your net pay and take advantage of pension tax relief.
To incentivise you to save for your retirement, the government tops up any pension contributions you make in the form of tax relief. The level of tax relief you get is based on the highest rate of income tax you pay.
However, there’s a limit on how much you can contribute per year, which currently stands at £60,000 or 100% of your earnings (whichever is lower).
The government announced in the Autumn Budget 2025 that from April 2029, the NI exemption on pension contributions made through salary sacrifice will be capped at £2,000.
You can use our pension tax-relief guide to help.
2. Travel-to-work schemes
Many employers allow their employees to use Cycle To Work schemes to save money on the purchase of a bicycle, which also reduces your taxable income.
You start by choosing the bike you want. The bike is bought by your employer, who then leases it to you.
Your salary will be reduced by the net cost of the bike for the hire period. Because these payments are taken from your salary before tax and National Insurance are applied, you pay less tax on that portion of income.
Your employer may also offer salary sacrifice schemes for leasing new cars. Unlike Cycle To Work, you will be required to pay tax on either the value of the car or the amount of salary sacrificed.
The amount of tax accrued depends on the car’s emissions rating. Lower-emission vehicles, such as electric cars, are usually taxed at lower rates.
- Find out more: should you use salary sacrifice?
3. Donating to charity and Gift Aid
Some employers offer a charitable giving scheme through payroll, where you can make donations and have them deducted from your salary before it’s taxed. This means you receive full tax relief on your gift immediately.
Alternatively, if you donate through Gift Aid, your donation is net of tax, which means the charity can reclaim an additional 20% of the balance directly from HMRC. Higher and additional-rate taxpayers can claim additional tax relief through their tax return.
4. Flexible benefit packages
Some employers offer flexible benefit packages, which allow employees to buy extra benefits.
Common options include private healthcare, life insurance and buying extra days of annual leave.
Some of these benefits, such as private medical insurance, are still taxed as a benefit in kind. This is a non-cash perk provided by your employer.
HMRC treats these perks as taxable income, meaning their value is added to your salary when calculating how much tax you owe.
If you’re considering a flexible benefit, check with your employer whether it’s taxed as a benefit in kind or offered through salary sacrifice. Only benefits that reduce your salary could help to lower your taxable income and potentially keep you below key thresholds.
- Find out more: tax free income and allowances
5. Reduce your hours
Another option is to reduce your working hours or move to part-time work.
This won’t be suitable for everyone, but some people may consider it if earning more would cause them to lose valuable benefits such as childcare support.
What are the downsides of salary sacrifice?
Although there are many benefits to salary sacrifice, there are drawbacks as well.
A lower salary can affect entitlements such as maternity/paternity pay, mortgage applications based on your income and some state allowances. This is because these payments are often calculated using your official salary after the salary sacrifice has been applied.
You should also check with your employer to make sure your bonuses, pay increases and pension benefits won’t be affected.
