The £100K Tax Trap: Why Earning More Costs You 6

I earned over £100,000 for the first time in my early thirties. I expected a bigger tax bill. I didn’t expect to hand over 60% of every extra pound I earned. When I saw the self-assessment numbers, I thought my accountant had made an error. He hadn’t. He just hadn’t warned me about the personal allowance taper. That conversation cost me a few thousand pounds and taught me a lesson I’ve never forgotten.

If you earn between £100,000 and £125,140, you are almost certainly caught in this trap right now. Here’s how it works and, more importantly, how to get out of it.

What the £100K trap actually is

Everyone in the UK gets a personal allowance of £12,570, which is the amount you can earn tax-free. But once your adjusted net income exceeds £100,000, HMRC starts clawing that allowance back. You lose £1 of personal allowance for every £2 you earn above £100,000.

By the time you reach £125,140, your personal allowance is completely gone. Every penny you earn is taxable.

The result is an effective marginal tax rate of 60% on income between £100,000 and £125,140. Not 40%. Sixty.

Why it’s 60%, not 40%

On paper, you’re in the higher rate band at 40%. But the taper adds an invisible extra 20%. Here’s the maths.

For every £2 you earn above £100K:

You pay 40% income tax on that £2: 80p
You also lose £1 of personal allowance, meaning an extra £1 of income is now taxed at 40%: 40p
Total tax on that £2: £1.20
Effective rate: 60%

When you add National Insurance at 2% (the rate for earnings above £50,270), the actual marginal rate hits 62%. For every additional pound earned in this band, you take home just 38p.

Worked example: earning £110,000

Let’s make this concrete. Say you earn £110,000.

You’re £10,000 above the £100,000 threshold. That means you lose £5,000 of your personal allowance (half of £10,000). Your personal allowance drops from £12,570 to £7,570.

Tax calculation:

First £7,570 (reduced personal allowance): £0
£7,571 to £50,270 (basic rate at 20%): £8,540
£50,271 to £110,000 (higher rate at 40%): £23,892
Total income tax: £32,432

Compare that to someone earning £100,000 with the full personal allowance:

Income tax on £100,000: £27,432

The difference? £5,000 more tax on £10,000 of extra earnings. That’s a 50% rate before NI. Add the 2% NI and you’re effectively paying 52% on the surface, but the allowance taper pushes the true marginal rate to 62% on every pound within that band.

The point is simple: that £10,000 pay rise from £100K to £110K only puts about £3,800 in your pocket after tax and NI. Makes you think.

How to legally avoid it

The good news is there are perfectly legal, HMRC-approved ways to bring your adjusted net income below £100,000 and reclaim your full personal allowance.

Pension contributions (the big one)

This is the most common and most effective strategy. If you earn £110,000, you can make £10,000 in pension contributions (gross) to bring your adjusted net income back to £100,000. Your personal allowance is fully restored.

The effective relief on those pension contributions is extraordinary. You get:

40% income tax relief: £4,000
Restoration of £5,000 personal allowance (taxed at 40%): £2,000
2% NI saving: £200
Total tax benefit: £6,200 on a £10,000 contribution

That £10,000 goes into your pension, grows tax-free, and you’ve effectively “bought” it for £3,800 of take-home pay. If your employer offers salary sacrifice, the numbers get even better because you save employer’s NI too.

If you have unused annual allowance from the previous three tax years, you can carry it forward. The standard annual allowance is £60,000 (or 100% of your earnings, whichever is lower). Most people in this income range are nowhere near using it all.

Charitable giving

Donations to registered charities through Gift Aid also reduce your adjusted net income. If you give £10,000 to charity (grossed up with Gift Aid, that’s £12,500), your adjusted income drops by £12,500.

This is clearly more altruistic than pension contributions, as you don’t get the money back. But if you’re already planning to make charitable donations, structuring them to bring your income below £100K is smart tax planning.

Timing your income

If you have any control over when income lands (bonuses, dividends, freelance invoices), you might be able to shift income between tax years. Bringing your income just below £100,000 in one year, even if it means receiving more the following year, can save you thousands.

This is particularly relevant for company directors who can choose when to take dividends, or for anyone with a variable bonus structure.

The cliff edge at £125,140

Once your income exceeds £125,140, your personal allowance is completely gone. There’s no further taper, and your marginal rate drops back to the standard 40% (plus 2% NI). Oddly, someone earning £130,000 has a lower marginal rate than someone earning £110,000.

This creates a strange incentive. If you can’t bring your income below £100K, there’s no particular benefit in trying to stay within the taper zone. You’re better off earning as much as possible and accepting the 40% rate above £125,140.

The worst place to be is between £100,000 and £125,140 without a strategy. That’s where the 60% rate bites hardest.

What I’d do if I were back there

If I could go back to the first year I crossed £100K, I would have made pension contributions on day one. Not at the end of the tax year when I was scrambling to find ways to reduce my bill. Not after the self-assessment shock. On day one.

The maths on pension contributions in this band are genuinely the best deal in the UK tax system. You get 60% effective tax relief, your money grows in a tax-free wrapper, and you’re building long-term wealth at the same time. It’s not a loophole. It’s the system working as designed. Sound familiar? HMRC literally wants you to do this.

If you earn above £100K and you’re not making pension contributions up to the threshold, you’re leaving thousands on the table every single year. Talk to your employer about salary sacrifice. Talk to your accountant about personal contributions. Just don’t sit in the 60% band and accept it.

That’s the one tax lesson I paid for the hard way so you don’t have to.

The £100K Tax Trap: Why Earning More Costs You 60%