£120,000 Salary Analysis: Surviving the 60% Tax Trap in 2025/2026

The Erosion of the Personal Allowance

Earning an annual salary of £120,000 is a phenomenal achievement, but it comes with a unique and punitive tax landscape. In the 2025/2026 tax year, once your income exceeds £100,000, your standard Personal Allowance of £12,570 is reduced by £1 for every £2 earned above that threshold. At £120,000, you have lost £10,000 of your tax-free allowance, leaving you with a mere £2,570. This "Personal Allowance taper" drastically increases your taxable income across all levels.

Understanding the 60% Effective Tax Rate

The convergence of the 40% Higher Rate of tax and the loss of your Personal Allowance creates what experts call the "60% Tax Trap." On the £20,000 portion of your income between £100,000 and £120,000, you are effectively paying 60% tax. This occurs because you pay 40% tax on the earnings itself, plus another 20% on the allowance that has been clawed back. When you factor in National Insurance and potential student loan repayments, your "take-home" on this specific portion can feel surprisingly low compared to the value you bring to your role.

Nearing the Additional Rate (45%) Frontier

At £120,000, you are standing on the edge of the UK’s highest tax bracket. The Additional Rate (45%) kicks in at £125,140. Once you cross this threshold, your Personal Allowance is completely eliminated (£0), and every additional pound earned is taxed at 45%. If you are anticipating a bonus or a pay rise that pushes you into this territory, understanding your precise net position is essential for effective financial planning in 2025/2026.

Tax-Efficient Strategies for £120k Earners

The single most effective way to navigate a £120,000 salary is through aggressive pension contributions. By sacrificing £20,000 of your salary into a pension (via Salary Sacrifice), you can bring your "Adjusted Net Income" back down to £100,000. This single move restores your full £12,570 Personal Allowance and effectively grants you 60% tax relief on your contribution. For £120k earners, our calculator is an indispensable tool for modeling how these strategic moves can radically improve your overall net worth and long-term financial security.