Tax planning·By Simon Jacobs, CTA · ACA·16 July 2026·4 min read

The 60% tax trap, and why agency owners keep hitting it

In short: Between £100,000 and £125,140 of income, an odd quirk of the UK system taxes every extra pound at an effective 60 percent. Here is why it happens, and why agency founders hit it so often.

There is a band of income in the UK where every extra pound is taxed at an effective 60 percent, even though no tax table anywhere lists a 60 percent rate. It catches a lot of successful agency founders by surprise, usually in the year the business has a good run.

What the 60% tax trap actually is

It comes from the way the Personal Allowance is withdrawn. Everyone gets a tax-free Personal Allowance, but once your income goes over £100,000 you start to lose it: £1 of allowance for every £2 of income above that line, until it is gone entirely at £125,140. Losing tax-free allowance while also paying tax on the income itself is what pushes the effective rate on that slice to around 60 percent. HMRC sets this out in its guidance on income over £100,000.

Does anyone really pay 60% tax?

Not as a headline rate, no. The published higher rate is 40 percent. But in the £100,000 to £125,140 band, the combination of 40 percent tax and the disappearing Personal Allowance means each extra pound effectively costs about 60 pence. Above £125,140 the effective rate drops back down, so the trap is specifically that slice in the middle.

Why agency founders hit it so often

Agency income is lumpy. A strong year, a big project, or a larger dividend taken to fund something can push a founder's income straight into the band without them planning for it. Because a lot of founders decide how to pay themselves late in the year, they can cross £100,000 almost by accident and hand over 60 pence in the pound on the top slice.

What you can do about it

There are legitimate, ordinary ways to manage income around that band, for example pension contributions, the timing of dividends, and how salary and dividends are split, all of which can reduce the income that falls inside the trap. Which of these actually help depends entirely on your numbers and your wider plan, so the honest answer is that we look at your specific position first. It is one of the everyday moves that quietly saves real money, and it sits inside broader profit extraction planning.

The Scottish 42% question

People often ask who pays 42 percent. That figure is Scotland's higher rate of income tax, because Scotland sets its own income tax rates, and it is separate from the 60 percent effective trap described here. The Personal Allowance taper that creates the trap applies across the whole UK. If you are a Scottish taxpayer the exact rates differ, so it is worth checking your own position.

The 60 percent trap is not a loophole or a scheme, it is simply how the rules interact, and it is very avoidable with a little planning before the income lands rather than after. If your agency is having a good year, that is exactly the moment to look at it. Rules and thresholds change, so always check the current position and take advice on your own numbers.

Common questions

It is the effective tax rate on income between £100,000 and £125,140. In that band you pay 40 percent tax and lose £1 of tax-free Personal Allowance for every £2 you earn, so each extra pound effectively costs around 60 pence. Above £125,140 the effective rate falls again.

Not as a listed rate; the published higher rate is 40 percent. But because the Personal Allowance is withdrawn between £100,000 and £125,140, the effective rate on that specific band works out at about 60 percent. It is a quirk of how the rules interact rather than a headline tax rate.

The 42 percent figure is Scotland's higher rate of income tax, because Scotland sets its own income tax rates separately from the rest of the UK. It is different from the 60 percent effective trap, which comes from the UK-wide Personal Allowance taper on income above £100,000.

There are ordinary, legitimate options such as pension contributions and planning the timing and mix of salary and dividends, so less income falls in the £100,000 to £125,140 band. What actually works depends on your numbers, so we look at your specific position on a call before suggesting anything.