How to Avoid the 60% Tax Trap in Retirement

Most people know about the 20%, 40%, and 45% income tax bands. Far fewer realise there's a hidden tax rate lurking in between — one that effectively takes 60p out of every extra pound you earn. It's not an official rate, and HMRC won't list it on any tax table, but it's very real. And if you're drawing retirement income from a pension, it's surprisingly easy to stumble into it.

The so-called "60% tax trap" catches people with total income between £100,000 and £125,140. In this band, you're not only paying 40% income tax — you're also losing your Personal Allowance at a rate of £1 for every £2 of income over £100,000. The combined effect is a marginal tax rate of 60%. On a £25,140 stretch of income, that means an extra £15,084 going to HMRC that you might have kept with a little planning.

How the 60% Tax Trap Works

In the 2025/26 tax year, everyone gets a Personal Allowance of £12,570 — the amount you can earn tax-free. But once your total taxable income exceeds £100,000, that allowance is gradually withdrawn. For every £2 of income above £100,000, you lose £1 of your Personal Allowance.

By the time your income reaches £125,140, the Personal Allowance has been reduced to zero. That £12,570 of previously tax-free income is now taxed at 40%, adding £5,028 to your tax bill on top of the 40% you're already paying on the income between £100,000 and £125,140.

Here's a quick example. Imagine you have total retirement income of £110,000 — perhaps £11,502 from the State Pension, £18,498 from a defined benefit scheme, and £80,000 from pension drawdown. Your Personal Allowance would be reduced by £5,000 (half of the £10,000 over the £100,000 threshold), leaving you with just £7,570 of tax-free income instead of £12,570. That lost £5,000 of allowance costs you an extra £2,000 in tax at 40%.

Why This Particularly Affects Drawdown Investors

If you're in flexi-access drawdown, you have complete control over how much taxable income you take each year. That's one of drawdown's great strengths — but it also means you can accidentally pull yourself into the 60% trap by withdrawing too much in a single tax year.

This is especially common in a few scenarios:

• Taking a large one-off withdrawal — perhaps to help a child buy a home, fund home improvements, or cover an unexpected expense. A single large withdrawal on top of your regular income can push you well over £100,000.
• Crystallising a large pension pot in one go — if you designate your entire pension for drawdown in one tax year, the 25% tax-free cash is fine, but the remaining 75% counts as taxable income if you withdraw it.
• Forgetting about other income sources — State Pension, rental income, dividends, part-time work, and defined benefit pension payments all count towards the £100,000 threshold. It's easy to lose track.

Six Strategies to Sidestep the Trap

The good news is that with some forethought, you can often avoid or minimise the impact of the 60% tax trap. Here are the most effective approaches.

1. Spread your withdrawals across tax years

Rather than taking a large lump sum in one year, consider spreading withdrawals across two or three tax years to keep your income below £100,000 in each. For example, if you need £50,000 for a home renovation, taking £25,000 this year and £25,000 next year could save you thousands in tax — provided your base income is around £80,000 or below.

2. Use your tax-free cash strategically

When you crystallise pension funds, 25% comes out tax-free (up to the lump sum allowance of £268,275). This tax-free portion doesn't count towards the £100,000 threshold. If you need a lump sum, consider whether crystallising a portion of your pension and taking just the tax-free element might meet your needs without triggering the trap.

3. Draw from ISAs in high-income years

ISA withdrawals are completely tax-free and don't count towards your taxable income at all. If you hold savings in both a pension and an ISA, you may want to consider drawing from the ISA in years when your pension income is already close to £100,000, and saving the pension withdrawals for years when your income is lower.

This is one of the reasons many financial planners advocate building a mix of pension and ISA savings before retirement — it gives you far more control over your tax position year by year.

4. Make pension contributions (if you're still eligible)

If you have earned income — perhaps from part-time work or consultancy — pension contributions reduce your taxable income for Personal Allowance purposes. A gross contribution of £10,000 would effectively lower your adjusted net income by £10,000, potentially restoring some or all of your Personal Allowance.

Be aware, though, that if you've already flexibly accessed a pension (which you likely have if you're in drawdown), the Money Purchase Annual Allowance (MPAA) limits your contributions to £10,000 gross per year.

5. Use salary sacrifice or gift aid

Charitable donations through Gift Aid extend your basic rate band and can also reduce your adjusted net income. If you're already planning charitable giving, timing donations to coincide with high-income years can be doubly effective. Similarly, if you're still employed, salary sacrifice arrangements reduce your taxable income before it reaches the £100,000 threshold.

6. Consider phased crystallisation

Rather than designating your entire pension pot for drawdown at once, you can crystallise it in stages — moving a portion into drawdown each year and taking the associated tax-free cash. This approach lets you access tax-free lump sums over several years without creating a spike in taxable income.

A Practical Example: The Difference Good Planning Makes

Let's say Sarah has a £400,000 pension pot, receives £11,502 from the State Pension, and wants to take £40,000 per year from her pension to fund her retirement lifestyle. Her total taxable income would be £51,502 — comfortably within the higher rate band but well below the £100,000 threshold. The 60% trap isn't an issue.

Now imagine Sarah also wants to release £80,000 to help her daughter with a house deposit. If she withdraws the full amount in one year, her taxable income jumps to £131,502. She'd lose her entire Personal Allowance and pay the effective 60% rate on a significant chunk of that income.

Instead, Sarah crystallises £106,667 of her pension. She takes £26,667 as tax-free cash (25%) and leaves the remaining £80,000 invested in drawdown. Her taxable income for the year stays at £51,502. Next year, she repeats the process with another tranche. Over two or three years, she gets the £80,000 her daughter needs while keeping her annual income well below £100,000.

The tax saving from this approach could easily be £5,000 to £10,000 or more, depending on her exact circumstances.

How to Check if You're at Risk

Before making any significant pension withdrawal, it's worth adding up all your expected income for the tax year:

• State Pension
• Defined benefit pension income
• Employment or self-employment income
• Rental income
• Dividend income (above the £500 dividend allowance)
• Savings interest (above the personal savings allowance)
• Any other taxable income

If the total before pension drawdown withdrawals is already approaching £100,000, even a modest withdrawal could push you into the trap. Our pension drawdown calculator can help you model different withdrawal scenarios and see the tax impact.

Key Takeaways

• The 60% tax trap affects income between £100,000 and £125,140, where the loss of Personal Allowance creates an effective 60% marginal tax rate.
• Drawdown investors are particularly vulnerable because they control the timing and size of their withdrawals.
• Spreading withdrawals, using tax-free cash strategically, and drawing from ISAs in high-income years are the most effective ways to manage this.
• Always add up all your income sources before making a large withdrawal — the State Pension, rental income, and other sources all count.
• The difference between good and poor tax planning can easily be worth £5,000–£10,000 or more per year.

Tax planning in retirement is more complex than most people expect, and individual circumstances vary enormously. If your income is anywhere near the £100,000 mark, speaking with a qualified financial adviser could help you structure your withdrawals in the most tax-efficient way. You can also use our retirement planner to map out your income over time, or compare drawdown providers to make sure you're getting the best deal on fees and flexibility.