Taxes in the UK can be quite a challenge to reduce due to their tight rules, which stop you from dodging any tax. Using loopholes can be quite risky, as they can lead to higher taxes, interest, and even penalties in the future.
However, on the bright side, HMRC encourages tax planning and even provides guidance. The tax system offers several reliefs and allowances that, if used wisely, can significantly reduce your effective tax burden.
Generally, we hear about 20%, 40% and 45% tax rates, but what is the new 60% tax rate not many seem to know about?
What Is the 60% Rental Income Tax Rate?
The 60% Rental Income tax rate is not an official HMRC tax band. Instead, it is a stealth tax, a kind that goes unnoticed. Mainly affecting people earning between £100,000 and £125,140.
Let’s see how it all works
Every taxpayer in the UK gets a £12,570 personal allowance, which is the amount you can earn tax-free. Once your income exceeds £100,000, you lose £1 of personal allowance for every £2 earned above that. By the time you earn £125,140, your entire personal allowance disappears.
This tapering effect means that for every extra £1 earned in this range, you effectively pay 60p in tax, a combination of the 40% higher rate and 20% from the lost personal allowance.
In other words, earning an extra £10,000 could cost you £6,000 in tax. It’s one of the most punishing marginal rates in the UK system.
Way to Avoid or Reduce the 60% Rental Income Tax Rate
As we earlier mentioned, tax allowances and reliefs have always got your back if you know how to use them. These are legitimate ways to lower your adjusted net income (the figure HMRC uses to determine the personal allowance withdrawal).
Let’s explore a few key strategies
Contribute to Your Pension
One of the most effective ways to reduce your tax is through pension contributions. These are deducted from your taxable income, helping you fall below the £100,000 threshold.
Example
If Alex earns £120,000 and makes a £20,000 pension contribution, your adjusted income becomes £100,000, restoring your full personal allowance and saving tax at an effective rate of 60%.
It’s essentially a double win: you secure your retirement savings and reduce your tax bill.
Make Gift Aid Donations
Charitable donations under the Gift Aid scheme also reduce your adjusted net income. For every £1 donated, the charity can reclaim 25p from HMRC, and higher-rate taxpayers can claim additional relief through their tax return.
Example
Sarah’s £4,000 donation becomes £5,000 gross under Gift Aid, effectively reducing her taxable income by £5,000.
This can help you retain part or all of your personal allowance.
Use Salary Sacrifice Arrangements
Many employers offer salary sacrifice schemes for pensions, electric cars, or cycle-to-work benefits. By sacrificing a portion of your salary, you:
It’s a highly efficient, HMRC-approved form of tax planning.
Time your Income & Bonuses
If you have control over when income is received, for example, dividends from your own company or a performance bonus, you may be able to defer income into a future tax year. This can prevent unnecessary crossing of the £100,000 threshold.
This works best with careful planning alongside an accountant.
Transfer Income-Producing Assets
If your spouse or civil partner pays tax at a lower rate, consider transferring income-generating assets, such as savings or property shares.
This shifts the income to them, keeping your own income below the tapering point.
However, the transfer must be genuine and not merely for tax avoidance.
Example of Savings in Action
Scenario | Gross Income | Pension Contribution | Adjusted Net Income | Tax Saved (40% rate) | Effective tax saved (60% rate) |
|---|---|---|---|---|---|
No Contribution | £120,000 | £0 | £120,000 | - | - |
With Pension | £120,000 | £20,000 | £100,000 | ~£8,000 saved | ~£12,000 saved |
A simple pension contribution can therefore deliver significant tax relief, sometimes worth more than a 40% saving alone.
Conclusion
The UK’s 60% tax trap is one of those hidden complexities that quietly catches many higher earners by surprise. It’s not a loophole or a punishment, just a quirk in how the personal allowance tapers away once income crosses £100,000.
While it can feel unfair, the good news is that you have options. Simple steps like pension contributions, Gift Aid donations, or salary sacrifice can bring your rental taxable income back under control, often saving thousands of pounds a year.
Tax planning isn’t about dodging the rules; it’s about understanding them well enough to make them work in your favour. With a bit of planning or a quick chat with a professional adviser, you can keep your finances efficient, compliant, and far away from the 60% tax zone.
FAQs
Adjusted net income is your total taxable income after deducting certain reliefs, such as pension contributions and Gift Aid. It’s the figure HMRC uses to determine whether your personal allowance should be reduced.
At £120,000, you are £20,000 above the £100,000 limit. You lose £1 of personal allowance for every £2 of excess income, so £10,000 of your £12,570 allowance disappears. You’ll only have £2,570 of it left.
Yes. The 60% rate applies to all types of income, employment, self-employment, rental, dividends, and even savings interest once your total adjusted net income exceeds £100,000.
A qualified UK tax adviser or accountant can review your income sources, calculate your adjusted net income, and recommend strategies such as pension top-ups or salary sacrifice. It’s often worth the cost when your marginal tax rate is this high.
Absolutely. HMRC encourages legitimate tax planning, not tax evasion. Using allowances and reliefs such as pensions and Gift Aid is fully within the rules and helps you manage your tax efficiently.
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