Why do I have to pay tax twice a year to HMRC?

You do not pay tax twice for the same year. HMRC asks for Payments on Account — advance payments towards your next tax bill. Each payment is roughly half of your previous year's tax liability. When you file your actual tax return, these advance payments are deducted from the final bill. If you overpaid, you get a refund. If you underpaid, you pay a balancing payment.

How do I reduce my Payments on Account?

You can reduce Payments on Account if you expect your next year's tax bill to be lower. Log in to your HMRC online account, go to Self Assessment, and select 'Reduce Payments on Account'. You can also do this via form SA303. Be careful: if you reduce them too much and your actual bill is higher, HMRC charges interest on the shortfall from the original due date.

What happens if I miss the 31 July Payment on Account?

If you miss the 31 July deadline, HMRC charges interest from 1 August at the prevailing rate (currently around 7.75% per annum). There is no immediate penalty for being a few days late, but interest accrues daily. If you are more than 30 days late, a 5% penalty is added to the unpaid amount. Further penalties apply at 6 and 12 months.

Do Payments on Account include Class 2 and Class 4 NICs?

Yes. Payments on Account are based on your total Self Assessment bill, which includes Income Tax, Class 4 National Insurance contributions, and any Student Loan repayments due through Self Assessment. Class 2 NICs are collected through Self Assessment and are therefore included in the calculation. However, Capital Gains Tax is excluded from Payments on Account and is paid all at once via the balancing payment.

Income Tax

The 60% Tax Trap: What It Is and How to Avoid It in 2026/27

📅 Updated 2 June 2026 ⏱ 8 min read ✍️ PayToolkit Editorial

Most people know the UK tax rates: 20%, 40%, and 45%. But there is a hidden band where the effective rate hits 60% — affecting anyone who earns between £100,000 and £125,140. If you are in this range and not planning around it, you could be handing HMRC significantly more than necessary.

What is the 60% Tax Trap?

The 60% tax trap occurs because of how the Personal Allowance is withdrawn for higher earners. In 2026/27, the standard Personal Allowance is £12,570 — the amount you can earn tax-free each year. However, once your income exceeds £100,000, HMRC removes £1 of Personal Allowance for every £2 of income above that threshold.

This means:

At £100,000 — full Personal Allowance of £12,570
At £112,570 — Personal Allowance reduced to £6,285
At £125,140 — Personal Allowance is zero

The problem is that as your allowance is withdrawn, every extra pound of income is taxed twice: at 40% as a Higher Rate taxpayer, and then again effectively because you are also losing tax-free allowance. Together, this creates an effective rate of 60% on income between £100,000 and £125,140.

A Worked Example

Suppose you earn exactly £100,000. Your tax bill is calculated as:

Personal Allowance: £12,570
Taxable income: £87,430
Tax on first £37,700 (basic rate band): £7,540
Tax on remaining £49,730 at 40%: £19,892
Total tax: £27,432

Now suppose you earn £101,000 — just £1,000 more:

Personal Allowance is reduced by £500 (half of the £1,000 excess over £100,000)
New Personal Allowance: £12,070
That £500 reduction in allowance means £500 more income is now taxed
Tax on that extra £1,000 of income: £400 (40%)
Tax on the £500 allowance removed: £200 (40%)
Total extra tax: £600 on £1,000 of extra earnings — an effective rate of 60%

Who Is Affected?

The 60% trap affects anyone whose total adjusted net income falls between £100,000 and £125,140. This includes:

Employees with salaries in this range
Self-employed people whose profits push them into this band
Company directors taking a combination of salary and dividends
Landlords whose rental income combined with employment income crosses £100,000
Anyone receiving bonuses that push them over the threshold

It is also worth noting that childcare entitlements are affected. Once adjusted net income exceeds £100,000, you lose the right to 30 free hours of childcare, adding further effective cost on top of the tax hit.

How to Escape the 60% Tax Trap

The most effective and widely used strategy is to make pension contributions to bring your adjusted net income below £100,000. Because pension contributions reduce your adjusted net income pound for pound, contributing enough to bring yourself below the threshold restores your Personal Allowance and eliminates the 60% effective rate entirely.

Here is how it works in practice:

Income: £110,000
Without planning: effective 60% rate on £10,000 above the threshold
If you contribute £10,000 to a pension: adjusted net income falls to £100,000
Personal Allowance fully restored: saving £4,000 in additional tax
Plus the pension contribution itself is tax-relieved at 40%: another £4,000 relief
Total benefit: £8,000 tax saving on a £10,000 pension contribution

This is why financial advisers often describe pension contributions in this income band as offering an 80% effective return — your pension grows and you save tax at 60%.

Other Strategies Worth Considering

Gift Aid donations: like pension contributions, charitable donations through Gift Aid reduce your adjusted net income, potentially restoring Personal Allowance.

Salary sacrifice: if your employer offers salary sacrifice arrangements for pension contributions, electric vehicles or cycle-to-work schemes, these reduce your gross salary and therefore your adjusted net income.

Timing income: if you have flexibility over when you receive income (particularly relevant for the self-employed or directors), you may be able to delay income into a year when your total falls below £100,000.

Spousal income splitting: for business owners, paying a spouse or civil partner a reasonable salary for work genuinely done in the business can reduce overall household tax by moving income to a lower-rate taxpayer.

Does the £125,140 Threshold Matter?

Once income reaches £125,140, the Personal Allowance is gone entirely. At this point you are back to a straightforward 45% Additional Rate on income above £125,140. The 60% effective rate only applies in the £100,000–£125,140 band — above it, the rate actually drops back to 45%.

This means the very worst position to be in is earning just over £100,000. Every pound of income in this band is costing you 60p in tax. With even basic pension planning, most people in this situation can significantly reduce or eliminate the trap entirely.

See your exact take-home pay
Use our Take-Home Pay Calculator to see how much you keep at different income levels, including the 60% trap band. Free, instant, no signup.

Reporting and Compliance

If you earn over £100,000, you are required to complete a Self Assessment tax return even if you are employed and pay tax through PAYE. HMRC uses this to recalculate your tax liability and collect any underpayment resulting from the Personal Allowance withdrawal. Make sure you are registered for Self Assessment if you are not already.

Your employer will not automatically adjust your tax code to account for the Personal Allowance withdrawal mid-year. HMRC will usually adjust your tax code after you file your return, but this means you may have a lump sum to pay in January if you have not set aside funds throughout the year.