The £100k salary trap: how losing your personal allowance really works
If you earn between £100,000 and £125,140, you're in one of the most punishing tax bands in the UK system. The effective marginal rate here isn't 40% — it's 60%. Here's why, and what you can do about it.
How the trap works
Everyone gets a Personal Allowance of £12,570 — income you don't pay tax on. But once your income exceeds £100,000, that allowance is reduced by £1 for every £2 you earn above the threshold.
At £125,140, your Personal Allowance reaches zero. That £25,140 of income has effectively been taxed twice:
- 40% higher-rate tax on the income itself
- 20% extra tax on the Personal Allowance you've lost (40% of £12,570 ÷ 2)
Result: 60% marginal rate on earnings between £100k and £125,140.
The pension contribution solution
Pension contributions reduce your "adjusted net income" — the figure used to calculate Personal Allowance tapering. If you earn £110,000 and contribute £10,000 to your pension, your adjusted income drops to £100,000 and your full Personal Allowance is restored.
The £10,000 pension contribution effectively cost you only £4,000 in lost take-home pay (because you avoided 60% tax). That's a 150% effective boost.
Other ways to reduce adjusted income
- Salary sacrifice: Reduce gross pay for pension, cycle-to-work, etc.
- Gift Aid donations: Grossed-up amount reduces adjusted income
- Trading losses: If you have a side business with losses, these can help
Child benefit charge: another cliff edge
The High Income Child Benefit Charge kicks in at £60,000 and reaches 100% at £80,000 (2024/25 rates). This is another reason to salary sacrifice or increase pension contributions if you're in this zone.