What is the Unofficial Effective Income Tax Rate of 60%?
Published / Last Updated on 10/11/2025
There has been much speculation that the government may look to put a cap on salary sacrifice, where employees ‘give up’ salary with their employers to have the equivalent paid into a pension scheme as an employer contribution. In addition, there is also speculation that the government may increase income tax rates as well.
What Would You Give Up Salary for Pension Contributions?
If you sacrifice salary, your ‘relevant earnings’ are lower meaning less income tax and national insurance and contributions to pensions are tax relieved.
Even if you do not do salary sacrifice but simply pay gross into a pension from your net earnings, you get full income tax relief. Tis gross contribution is deducted from earnings meaning you again have lower ‘relevant earnings’.
By having lower relevant earnings:
- You may push your income below the Child Benefit earnings thresholds (£60,000-£80,000), to get some/all child benefit back.
- You may push your income below the £100,000 earnings threshold, to get some/all of your personal tax free allowance back (for every £2 earned above £100,000, the personal tax allowance of £12,570 is reduced by £1, meaning more ernings are in the 40% tax band and possible more in the 45% tax band if you have relevant earnings above £125,140.
- If you do exceed the £100,000, the effective rate of tax for the amount above £100,000 is currently a staggering 60%.
Remember, for every £2 you earn above £100,000, your personal tax allowance is reduced by £1, meaning more income gets taxed at 40%, meaning a higher effective rate of tax on the amount above £100,000.
Unofficial Effective Income Tax Rate of 60% Calculation - Current Rates of Income Tax
If an individual earns an extra £2,000 when their total income is above £100,000 (e.g., rising from £105,000 to £107,000):
- Income Tax on the extra £2,000: They pay 40% of £2,000 = £800.
- Loss of Personal Allowance: Their Personal Allowance is reduced by £1,000 (£2,000 / 2).
- Tax on the lost Allowance: This extra £1,000 is now subject to 40% income tax = £400.
- Total Tax Paid on extra £1,000 (£800 + £400) = £1,200.
- Effective Tax Rate: £1,200 tax out of £2,000 is 60%.
Unofficial Effective Income Tax Rate of 60% Calculation – If 2% Increase on Income Tax Rates
If an individual earns an extra £2,000 when their total income is above £100,000 (e.g., rising from £105,000 to £107,000):
- Income Tax on the extra £2,000: They pay 42% of £2,000 = £840.
- Loss of Personal Allowance: Their Personal Allowance is reduced by £1,000 (£2,000 / 2).
- Tax on the lost Allowance: This extra £1,000 is now subject to 40% income tax = £420.
- Total Tax Paid on extra £1,000 (£840 + £420) = £1,260.
- Effective Tax Rate: £1,260 tax out of £2,000 is 63%.
It has never been more worthwhile if you are earning over £100,000 to try and make a gross pension contribution to get your ‘Net Relevant Earnings’ to £100,000 pa or below to avoid losing some or all of your personal tax allowance in addition to the bonus of income tax relief on the gross pension contribution.
We wonder why it is rumoured restrictions may be applied to salary sacrifice on pension contributions and/or an increase in income tax rates in the Autumn Budget 2025 (26th November 2025)?
