Could you get caught in a tax trap? How good advice can help

Getting a bonus could never be a bad thing, could it? That’s not how it seemed to Nathan after his latest annual salary review.

His £14,000 bonus, on top of his £88,000 a year salary put him just over the £100,000 mark.

So far so good you think, but that bump in earnings had a downside. He lost part of his personal tax-free allowance for the year and, perhaps even more importantly for him, his family missed out on their entitlement for government-funded childcare. With a son in nursery full time and the fees creeping into hundreds of pounds a week, suddenly, it felt like getting this bonus would actually make him worse off.

He’s been caught in a tax trap.

Hold that cynicism for a moment…

Yes, we know, when these stories appear in the media (and there are a lot of them) the response is usually something like “play me the world’s smallest violin”.

A salary of £100,000+ is much higher than the national average, but it’s no longer that uncommon. It’s estimated more than 2 million taxpayers will earn over this amount in the next tax year.[1] In areas like London, where the average house price is nearly 12 times higher the average yearly salary (in the South East it’s just over nine times),[2] there’s a growing band of people who don’t feel as comfortable as their salaries would suggest. Collectively, they’re known as HENRYs – high earners not rich yet.

Nathan’s conundrum over his bonus – a reward that feels like a penalty – is one of several tax traps that are becoming increasingly common as wage growth pushes people into higher tax bands. Paying attention to where these tax traps are and what you can do to mitigate them can save you thousands of pounds a year:

What are the tax traps?

“The 60% trap”
This is probably the most common trap – catching out an estimated 634,000 UK taxpayers in 2023/24 (according to a Freedom of Information Request to HMRC).[3] Your tax-free personal allowance (currently £12,570) tapers off for earnings over £100,000. You lose £1 of your tax-free personal allowance for every £2 of adjusted net income you earn above the threshold. It means that between £100,000 and £125,140, your marginal rate for income tax is effectively 60% (in Scotland, where tax rates differ, it’s an effective 67.5% rate).

“The Child Benefit trap”
Child benefit is not means tested and available to all who claim it. But again, for those on higher salaries it’s tapered. Under the High Income Child Benefit Charge, parents earning more than £60,000 must repay some – or all – of their child benefit back via their tax return. At £80,000 the whole amount has to be paid back. One of the anomalies of the system is that a single earner of £80,000 loses the benefit, but two earners just under the £60,000 threshold do not.

“The £260,000 tax trap”
Another tax trap now being discussed more frequently affects how much you can pay into your pension. You can pay £60,000 (or 100% of your salary, whichever is lower) into your pension each year tax free. However, if your adjusted income is more than £260,000, the allowance reduces £1 for every £2 you go above the threshold. Once you earn £360,000, the allowance is cut to the minimum level of £10,000 per year. Pay in anything above this limit and it’s treated by HMRC as an unauthorised payment, and a hefty fine for this (more than 50%) could potentially wipe out any tax relief.

What you can do – pension payments are still the best route

Going back to Nathan and his bonus, which would mean losing part of his personal allowance for that year and childcare entitlement. One way for him to approach this was by using his pension. After speaking to us, he chose to sacrifice this bonus and pay it directly into his pension. This brought down his effective earnings for the year.

Another option to bring down adjusted net income is by giving a proportion of your income to charity. Donating to a qualifying charity (one recognised by HMRC) reduces your taxable income and allows you to reclaim some or all your personal allowance.

For higher earners, who are already near the £60,000 annual pension allowance threshold and at risk of falling into the £260,000 tax trap, the options are more limited, but there are still areas to explore.

For example, it might be possible to delay expected bonus payments, to ensure they come within a different tax year. You can also make use of unused pension allowances from the previous three years. Some investors (those comfortable with higher risk levels for example) can gain tax relief from putting money into Venture Capital Trusts (VCTs), although these are a riskier option for your capital and the amount of income tax relief is reducing from 30% to 20% from April this year.

Take advice

It’s fair to say that the current tax rules weren’t intended to hit earners with a 60% tax rate. But as tax rules evolve, they often throw up unintended outcomes. For us, the potential for tax traps shows the value of seeking out good financial advice. Even if you keep up to date on the latest financial news and consider yourself well informed, it’s still easy to misinterpret the rules.

And making a mistake could prove to be very expensive.

Please note: The value of investments can go down as well as up and you may get back less than you originally invested. Past performance is not a guide to future returns.

The Financial Conduct Authority does not regulate Tax Planning.

VCTs are high risk investments and there may be no market for the shares should you wish to dispose of them. You may lose your capital.

The information in this blog was correct as of 6 February 2026.

[1] Source: Rathbones, via FT Adviser

[2] Source: Finder. Mortgage statistics

[3] Source: Scottish Financial News