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60% tax? What to do if you just started earning over £100,000

We've updated this guide on 5th March 2021

You’ve just been promoted. Or got a big commission from your sales. Or a bonus as a reward for your hard work. Or simply, you’re just earning over £100,000 because you work 100 hours a week.

It should be a reason to celebrate – if only you weren’t paying a higher tax rate than anyone in the UK (even than people earning more than you).

How does the 60% tax rate work?

Basically, everyone in the UK is entitled to an amount of money that’s tax-free. This is called the Personal Allowance and it’s worth £12,570 this year. Over this, you pay tax in tranches, from 20% to 45%.

Where does the 60% come from? Well, once you earn over £100,000, you start losing your Personal Allowance – one pound of allowance per every two pounds over this £100,000 threshold.

If you do the maths, this is exactly 60% for the income between £100,000 and £120,000. And this doesn’t include National Insurance – that’s another 2% on top.

This is the second highest tax rate in all of Europe. There is only one other place that has higher tax: Munkedal, a small region in Sweden with a population of 10,000, which has a staggering marginal tax rate of 70%.

The only place in Europe where you’d pay more tax than in UK if you earn over £100,000.

What can you do to reduce your tax rate?

The good news is that there are quite a few things you can do to reduce your tax rate. 

Here is our advice:

1. Save more into your pension

Sure – saving money for retirement is the last thing on your mind when you’re in your 20s or even 30s. It does sound like a bad deal: locking money until you’re 55. In reality, it’s one of the best ways to cut your tax bill.

Why should you save into your private pension?

Three reasons:

  • You get your tax back on whatever money you save. That 60%? You can get it back.
  • Your employer usually has to top up your contribution (up to a limit, usually 4-5% of your salary these days).
  • And the gains you make, over time, will be tax-free as well. So whatever return you make on your initial investment is completely tax-free when you’re 55.

How does the pension tax relief work?

Is your employer using “net pay” for your pension contribution? 

Good news: whatever you save already includes any tax you would have paid. No need to do anything. 

Bad news: it’s quite hard to change how much you save whenever you want to save more – you have to ask your employer whenever you want to save more or less…

Is your employer using “relief at source”? Then how much tax you can get back depends on how much you earn:

  • Under £150,000 a year: you can save up to £40,000 into your pension, and get back the whole amount of tax on it. Your pension provider will help you get back about half of that automatically, and you can get the rest by filing a Self Assessment tax return.
  • Over £210,000 a year: works the same but you can only save up to £10,000 into your pension.
  • Between £150,000 and £210,000: how much you can save decreases gradually – you can use this pension tax relief calculator to see exactly how much.

Is it worth it?


Look at the example below – for £120,000 your overall tax rate is 32%. With National Insurance it gets almost to 39%.

If you save £30,000 into your pension, you’re getting back half of your tax back – and your overall tax rate becomes just under 20%. 

Without private pensionWith private pension
You earn: £120,000You earn: £120,000
You save: £0You save: £30,000
Tax relief: £0Tax relief: £15,000
Tax you pay: £39,500Tax you pay: £23,500
Overall tax rate: 32%Overall tax rate: 19.6%

Another way to look at it: compared to saving 30,000 in a normal savings account, by saving it into your pension you get an instant 66% return:

  • 30,000 your original “investment”
  • You get 10,000 as an automatic tax relief
  • You can get another £15,000 if you file a Self Assessment tax return
  • Your employer will usually contribute about 4% of your salary too (that’s 4,800 in this case).

Add a conservative 7% annual return from FTSE100 over the past 30 years, and by the time you’re 55 your £30,000 will be worth a little over £270,000.

That’s a 442% return over 25 years (presuming you save this amount when you’re 30).

2. Ask for a non-cash bonus instead of a cash one 

This works great if you’re starting out in investment banking or consulting, where usually it’s the bonus that sends you into the 60% territory. 

By reducing your cash earnings by just a bit, you can push your income below £100,000 – while also getting your bonus. 

For example:

  • Private medical insurance (including tests, treatments, etc.)
  • Company car (especially if it’s electric)
  • Childcare.

All of these are tax-free if you get them through a “salary sacrifice” scheme.

3. Invest in startups

This is another great way to save on tax.

It works very similar to the pension tax relief: you invest in a startup today and you can get the tax back on that amount through a Self Assessment tax return.

There are three startup investment schemes in the UK:

Plus, if the startup that you invest in makes it big, you don’t have to pay any tax on this profit, either. 

How to find startups to invest in if you’re not a professional angel investor:

Just remember to file a Self Assessment and declare these investments: if you don’t, not only will you not get your tax back, the gains from the eventual profit (IPO, acquisition…) will not be tax-free either.

What you need to do now:

  • Talk to your employer about salary sacrifice schemes
  • Contribute to your pension and register to startup crowdfunding platforms
  • Register for Self Assessment – and get your Unique Taxpayer Reference (UTR) as early as you can to avoid being fined
  • File your Self Assessment before 31st January of the year following your investment so you don’t lose your tax relief.

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