You have just been told you are getting a pay rise. Congratulations. But before you start spending the extra money in your head, it is worth understanding exactly how much of that increase will actually reach your bank account. The UK tax system means that the percentage of a pay rise you keep depends heavily on where you sit within the income tax and National Insurance thresholds. In some cases, you might keep as little as 38 pence of every extra pound you earn.
The Basics: Marginal Tax Rates
When people talk about tax rates, they often confuse their overall effective tax rate with their marginal tax rate. Your effective tax rate is the average percentage of your total income that goes to tax and NI. Your marginal rate is the percentage you pay on the last pound you earn, and this is the rate that applies to a pay rise.
For most UK employees in the 2025-26 tax year, the marginal rates break down as follows. If you earn between 12,571 and 50,270 pounds, you pay 20% income tax and 8% National Insurance on each additional pound, giving a combined marginal rate of 28%. This means you keep 72 pence of every extra pound. If you earn between 50,271 and 125,140 pounds, the income tax rate rises to 40% while NI drops to 2%, giving a combined marginal rate of 42%. You keep 58 pence in every pound. Above 125,140 pounds, the income tax rate is 45% and NI remains at 2%, meaning a combined marginal rate of 47% and you keep 53 pence per pound.
The 60% Tax Trap
One of the most punishing marginal rates in the UK tax system is not immediately obvious from the headline rates. If your income falls between 100,000 and 125,140 pounds, you lose one pound of your Personal Allowance for every two pounds you earn above 100,000. This effectively adds an extra 20% to your marginal tax rate, creating a total marginal rate of 62% (40% income tax plus 20% effective rate from allowance withdrawal plus 2% NI).
This means that if you currently earn 95,000 pounds and receive a 10,000 pound pay rise taking you to 105,000 pounds, a significant portion of that raise falls within the 60% trap. On the 5,000 pounds between 100,000 and 105,000, you would keep only about 1,900 pounds after tax and NI. Understanding this trap is crucial for salary negotiations and financial planning at this income level.
Real-World Examples
Example 1: Basic Rate Taxpayer
Sarah earns 30,000 pounds a year and receives a 3,000 pound pay rise to 33,000 pounds. Her entire raise falls within the basic rate band. She will pay 20% income tax (600 pounds) and 8% NI (240 pounds) on the extra 3,000 pounds. Her annual take-home pay increases by 2,160 pounds, or 180 pounds per month. She keeps 72% of her raise.
Example 2: Approaching the Higher Rate Threshold
James earns 48,000 pounds and receives a 5,000 pound pay rise to 53,000 pounds. The first 2,270 pounds of his raise (up to the 50,270 threshold) is taxed at the basic rate, and he keeps 72% of that (1,634 pounds). The remaining 2,730 pounds is taxed at the higher rate of 40% income tax plus 2% NI, and he keeps 58% (1,583 pounds). His total additional take-home pay is 3,217 pounds per year, or about 268 pounds per month. His effective rate on the full raise is roughly 36%.
Example 3: The 60% Trap in Action
Emma earns 98,000 pounds and receives a 7,000 pound pay rise to 105,000 pounds. The first 2,000 pounds (up to 100,000) is taxed at the normal higher rate of 42%, leaving her 1,160 pounds. The next 5,000 pounds falls into the Personal Allowance withdrawal zone. On this portion, her effective marginal rate is approximately 62%, leaving her just 1,900 pounds. Her total additional take-home pay is around 3,060 pounds from a 7,000 pound raise, meaning she keeps only 44% overall. She might want to consider pension contributions to reduce her taxable income below 100,000 and retain her full Personal Allowance.
How Pension Contributions Change the Picture
Salary sacrifice pension contributions are deducted before income tax and National Insurance are calculated, which means they reduce your taxable income. For higher rate taxpayers, every pound put into a pension through salary sacrifice effectively costs only 58 pence. For those caught in the 60% trap, the cost is just 38 pence per pound.
This makes pension contributions particularly powerful as a strategy when you receive a pay rise. If James from our earlier example puts his entire 5,000 pound raise into his pension through salary sacrifice, it costs him only 3,217 pounds in lost take-home pay but adds the full 5,000 pounds to his pension pot. For Emma, sacrificing the 5,000 pounds that falls in the 60% trap would cost her only 1,900 pounds in take-home pay but adds 5,000 pounds to her pension. The tax efficiency is remarkable.
Student Loan Repayments
If you are repaying a student loan, your marginal rate is even higher. Plan 1 and Plan 2 loans both require 9% repayment on earnings above their respective thresholds. If you are a basic rate taxpayer repaying a Plan 2 student loan, your combined marginal rate is 37% (20% income tax plus 8% NI plus 9% student loan). A higher rate taxpayer with a student loan faces a marginal rate of 51%. If you also have a Postgraduate Loan at 6%, you can add that on top.
This means a higher rate taxpayer with both a Plan 2 student loan and a Postgraduate Loan has a marginal rate of 57% before even considering the Personal Allowance withdrawal zone. Understanding these compounding deductions is vital when evaluating the true value of a pay rise.
The Impact on Benefits and Allowances
A pay rise can also have knock-on effects beyond your immediate tax bill. If your income crosses certain thresholds, you may lose entitlement to benefits or tax advantages that have real monetary value.
- Child Benefit: If your income rises above 60,000 pounds, you start losing the High Income Child Benefit Charge. At 80,000 pounds, the full amount is effectively clawed back. For a family with two children, this can be worth over 2,000 pounds a year.
- Marriage Allowance: If your income exceeds the basic rate band (50,270 pounds), you can no longer receive the Marriage Allowance transfer from your spouse.
- Tax-Free Childcare: If either parent earns above 100,000 pounds, the family loses access to Tax-Free Childcare, which can be worth up to 2,000 pounds per child per year (4,000 for disabled children).
- Personal Savings Allowance: Basic rate taxpayers get a 1,000 pound tax-free savings allowance. Higher rate taxpayers get 500 pounds, and additional rate taxpayers get nothing.
Salary Sacrifice and Other Strategies
Beyond pension contributions, there are other salary sacrifice arrangements that can make a pay rise more tax-efficient. The Cycle to Work scheme allows you to sacrifice salary in exchange for a bicycle and accessories, saving both income tax and National Insurance. Electric car salary sacrifice schemes have become increasingly popular and offer significant savings because of the low Benefit in Kind rate on electric vehicles.
Charitable donations through payroll giving (Give As You Earn) are also tax-efficient, as they are deducted before tax is calculated. If you were already planning to give to charity, doing so through payroll can make your donations go further.
Negotiating a Pay Rise: Think Net, Not Gross
When negotiating a salary increase, it pays to know your marginal rate in advance. A 5,000 pound gross pay rise sounds substantial, but if you are a higher rate taxpayer, it translates to roughly 2,900 pounds extra per year, or about 242 pounds per month. In some cases, negotiating for non-cash benefits such as additional holiday, flexible working, professional development budgets or enhanced pension contributions may provide better value than a modest pay increase.
Our net pay calculator includes a pay rise comparison tool that shows you exactly how much more you would take home at different salary levels. Use it before your next salary review to go in with realistic expectations and a clear understanding of the numbers.
Summary
A pay rise always increases your take-home pay, but the amount you keep varies significantly depending on your income level. Basic rate taxpayers keep 72 pence of every extra pound, higher rate taxpayers keep 58 pence, and those caught in the Personal Allowance trap keep just 38 pence. Factor in student loan repayments, pension contributions, and potential loss of benefits, and the picture becomes even more complex. The key takeaway is to look beyond the gross figure and focus on the net impact. Understanding your marginal rate empowers you to make better decisions about salary negotiations, pension planning and overall financial strategy.