So you've got a pay rise. Brilliant -- well done. But before you mentally redecorate the kitchen, let's talk about how much of that raise actually makes it to your bank account. Because the UK tax system has a way of dampening the excitement. Depending on your salary, you might keep as little as 38p of every extra pound. Yes, really.
The Basics: Marginal vs Effective Tax Rates
People mix these up constantly, so let's get it straight. Your effective tax rate is the overall percentage of your total income that goes to tax and NI -- the average across everything. Your marginal rate is what you pay on the next pound you earn. That's the one that matters for a pay rise.
For 2025/26, the marginal rates look like this:
- £12,571 to £50,270 -- 20% income tax + 8% NI = 28% combined. You keep 72p per pound.
- £50,271 to £100,000 -- 40% income tax + 2% NI = 42% combined. You keep 58p.
- £100,001 to £125,140 -- the infamous 60% trap (more on that below). You keep roughly 38p.
- Above £125,140 -- 45% income tax + 2% NI = 47% combined. You keep 53p.
Notice anything odd? Earning between £100k and £125k is actually taxed more heavily than earning above £125k. Welcome to the Personal Allowance taper.
The 60% Tax Trap
This is the one that catches people off guard. Earn over £100,000 and HMRC starts clawing back your £12,570 Personal Allowance -- you lose £1 of allowance for every £2 you earn above £100k. By the time you hit £125,140, your Personal Allowance is completely gone.
The maths works out to an effective 62% marginal rate in that band: 40% income tax + 20% from the allowance withdrawal + 2% NI. So if you're on £95,000 and you get a £10,000 raise to £105,000, that £5,000 between £100k and £105k? You'll keep about £1,900 of it. The other £3,100 goes to HMRC. That's a bitter pill when you've negotiated hard for a raise.
Real-World Examples
Sarah: Basic Rate Taxpayer
Sarah earns £30,000 and gets a £3,000 raise to £33,000. All of it sits in the basic rate band. She pays 20% income tax (£600) and 8% NI (£240). Her take-home goes up by £2,160 a year -- that's £180 extra per month. She keeps 72% of the raise. Not bad at all.
James: Crossing into Higher Rate
James earns £48,000 and gets a £5,000 raise to £53,000. Here's where it gets interesting. The first £2,270 (up to the £50,270 threshold) is taxed at the basic rate -- he keeps 72%, or £1,634. The remaining £2,730 gets hit at the higher rate -- he keeps 58%, or £1,583. Total extra take-home: £3,217 a year, roughly £268 per month. His effective rate on the raise is about 36%. Not the full 42% that scares people, because the raise straddles both bands.
Emma: Caught in the 60% Trap
Emma earns £98,000 and gets a £7,000 raise to £105,000. The first £2,000 (up to £100k) is taxed at the normal higher rate of 42% -- she keeps £1,160. But the next £5,000 falls squarely in the Personal Allowance withdrawal zone, where her marginal rate is roughly 62%. She keeps just £1,900 of that. Total from a £7,000 raise? About £3,060 in her pocket. That's 44%. She'd be smart to look at pension contributions to keep her taxable income under £100k.
How Pension Contributions Change the Picture
Salary sacrifice into a pension comes out before income tax and NI are calculated. That means for higher rate taxpayers, every pound going into your pension only "costs" you 58p in lost take-home pay. For anyone in the 60% trap, it costs just 38p. Think about that for a moment -- you put in a pound, it only costs you 38p. Your future self will thank you.
Take James: if he puts his entire £5,000 raise into his pension via salary sacrifice, it costs him £3,217 in take-home pay but adds the full £5,000 to his pension pot. For Emma, sacrificing that £5,000 in the 60% zone costs her just £1,900 in take-home but puts the full £5,000 away. That's genuinely one of the best deals in the UK tax system.
Student Loan Repayments
Got a student loan? Add another 9% to your marginal rate. A basic rate taxpayer repaying a Plan 2 loan has a combined marginal rate of 37% (20% tax + 8% NI + 9% student loan). Higher rate? That's 51%. Got a Postgraduate Loan too? Stick another 6% on top.
Let that sink in: a higher rate taxpayer with a Plan 2 and Postgraduate Loan has a marginal rate of 57%. And that's before the Personal Allowance taper. If you're in the £100-125k band with both loans, your marginal rate is north of 70%. At that point, salary sacrifice into a pension isn't just sensible -- it's almost irrational not to.
Watch Out for Benefit Cliffs
A pay rise doesn't just affect your tax bill. Cross certain thresholds and you can lose valuable benefits entirely. That can make a modest raise cost you money overall.
- Child Benefit: Earn over £60,000 and the High Income Child Benefit Charge starts eating into it. By £80,000 it's fully clawed back. Two kids? That's over £2,000 a year gone.
- Marriage Allowance: Go above £50,270 and you can no longer receive the Marriage Allowance transfer from your partner.
- Tax-Free Childcare: Either parent earns over £100,000? The whole family loses access. That's up to £2,000 per child per year (£4,000 for disabled children) vanishing overnight.
- Personal Savings Allowance: Basic rate taxpayers get £1,000 tax-free on savings interest. Higher rate gets £500. Additional rate gets nothing.
Other Tax-Efficient Strategies
Pensions aren't the only salary sacrifice option worth considering. Cycle to Work saves you tax and NI on a bike purchase. Electric car salary sacrifice schemes are increasingly popular -- the Benefit in Kind rate on EVs is still very low, making them a seriously good deal. If you're already donating to charity, switching to Give As You Earn (payroll giving) means your donations come out before tax. Same charity, more of your money reaches them.
Negotiating a Pay Rise: Think Net, Not Gross
Here's practical advice from someone who's sat in those meetings: know your marginal rate before you negotiate. A £5,000 gross raise sounds great in the conversation. But if you're a higher rate taxpayer, that's roughly £2,900 extra per year -- about £242 a month. Still welcome, but maybe not life-changing.
Sometimes non-cash benefits are worth more. An extra five days' holiday, remote working flexibility, a training budget, or boosted employer pension contributions might deliver better value than a gross number that sounds impressive but gets carved up by HMRC. Run the numbers first. Our net pay calculator has a pay rise comparison feature that shows exactly what you'd take home at different salary levels. Use it before your next review -- walking in with the actual figures gives you a much stronger negotiating position.
The Bottom Line
A pay rise always puts more money in your pocket. Always. But the amount varies wildly. Basic rate taxpayers keep 72p of every extra pound. Higher rate? 58p. Stuck in the Personal Allowance taper? Just 38p. Add student loans, benefit clawbacks and pension decisions into the mix and there's a lot to think about. The people who come out best are the ones who understand their marginal rate and plan around it -- not after the raise, but before they even walk into the meeting.