Stealth tax catching high-earning pensioners

Strategic financial planning is key

This situation poses a genuine risk of losing valuable experienced workers from the workforce. As taxes take an increasingly large share, many high earners might question whether continuing to work is worthwhile, possibly opting to cut their hours or retire earlier to avoid such a heavy tax burden. This is a crucial consideration, especially with the State Pension also adding to taxable income.

Nevertheless, there are effective strategies to mitigate the effects of the 60% tax trap, and pensions are a valuable tool. Contributing to a pension can lower your ‘adjusted net income’, the figure used by HMRC to determine your tax liabilities. By making pension contributions, you can bring your income below the £100,000 threshold, which not only entitles you to 40% tax relief but also helps you retain your full tax-free personal allowance.

Navigating the rules and allowances

If you contribute to a private pension, such as a SIPP, remember to declare the contribution on your tax return to claim the full higher rate relief, as only basic rate relief is applied automatically. It is also important to be aware of certain pension rules. For instance, older workers who have already started drawing a taxable income from their pension may be subject to the Money Purchase Annual Allowance (MPAA). This reduces your annual allowance from £60,000 to just £10,000 and removes the ability to use ‘carry forward’ relief from previous years.

Another option is to delay claiming your State Pension. For each year you postpone, your future entitlement increases. This could be a prudent move for those currently caught in the tax trap who plan to reduce their work and enter a lower tax band soon. Navigating these complexities requires careful planning to ensure you maximise your earnings.

This article is for information purposes only and does not constitute tax, legal or financial advice. Tax treatment depends on individual circumstances and may change in the future. A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available. Investments can fall as well as rise in value, and you may get back less than you invest.

Source data:

[1] Freedom of Information request by Interactive Investor to HMRC 30/10/25.