For the 2026-27 tax year, individuals with income between £100,000 and £125,140 face an effective marginal income tax rate of 60%. This unusually high rate is not a separate tax band but arises because the personal allowance is gradually withdrawn once income exceeds £100,000.
The personal allowance remains £12,570 for 2026-27 and continues to be withdrawn at the rate of £1 for every £2 of adjusted net income above £100,000. Once income reaches £125,140, the personal allowance is completely lost.
This tapering creates an effective marginal tax rate of 60% on income within this band. Normally, income in the higher rate band is taxed at 40%. However, when the personal allowance is reduced, part of the income that would otherwise have been tax free becomes taxable. In practical terms, every additional £1 of income above £100,000 results in 40% higher rate tax plus a further 20% effective charge caused by the loss of personal allowance.
For example, an additional £1,000 of income above £100,000 may lead to £400 higher rate tax plus tax on £500 of lost personal allowance, creating a further £200 tax liability. The combined effect produces an effective marginal rate of 60% within this band.
The issue has become more significant because income tax thresholds are currently frozen until at least April 2031, meaning more individuals are gradually being drawn into this band as earnings increase.
The High Income Child Benefit Charge should also be considered when reviewing income levels. For 2026-27, the charge applies where adjusted net income exceeds £60,000, and Child Benefit is fully withdrawn once income reaches £80,000. This change increased the upper limit from the previous £60,000 cap, reducing the marginal impact on families compared with earlier years. (GOV.UK)
Planning ideas to consider
There are several legitimate planning steps that may help individuals reduce adjusted net income below £100,000 or limit the impact of the personal allowance taper.
Pension contributions are often the most effective strategy. Personal pension contributions attract tax relief and reduce adjusted net income for the purposes of calculating the personal allowance. A carefully timed pension contribution may restore some or all of the personal allowance and significantly reduce the effective marginal tax rate.
The 60% marginal band is often described as a hidden tax trap because it does not appear in standard tax tables. Individuals approaching this income level may benefit from reviewing their position before the end of the tax year to ensure that planning opportunities are not overlooked.