The £100,000 tax trap
By George Smart, Financial Planner, Walker Crips Financial Planning
For working professionals whose total income approaches or exceeds £100,000, a little-known quirk in the UK tax system can result in an effective income tax rate of 60%. It is one of the most significant and least understood features of the UK tax system — and with more people being drawn into this bracket every year, it is something that an increasing number of families and individuals need to be aware of.
In this article, I want to explain how the trap works, who is at risk of falling into it, and why the right planning can make a very significant difference.
The hidden 60% tax band
Most UK taxpayers are familiar with the three main income tax bands: the basic rate, the higher rate, and the additional rate. What many do not realise is that there is an unofficial ‘trap zone’ sitting between £100,000 and £125,140 where the effective marginal rate of income tax reaches 60%.
This happens because HMRC gradually withdraws the Personal Allowance (the amount of income you can earn tax-free) for those whose adjusted net income exceeds £100,000. For every £2 of income above this threshold, £1 of your Personal Allowance is removed. By the time your income reaches £125,140, the entire Personal Allowance of £12,570 has been wiped out entirely.
The effect is that on income you earn between £100,000 and £125,140, you pay 40% higher-rate tax on the income itself, plus an effective additional 20% from the lost personal allowance — creating a 60% effective marginal tax rate.
A simple illustration
Comparing earnings of £110,000 vs £100,000 — the extra £10,000 of income costs:
- £4,000 in higher-rate tax on the additional income (40%)
- £2,000 in tax arising from the loss of £5,000 of Personal Allowance (20%)
- Total tax on that £10,000: £6,000 — an effective rate of 60%
The precise figures will depend on individual circumstances. But the principle is clear: within this band, earning more can cost you far more in tax than most people realise.
If you would like to understand exactly what this means for your own situation, I would be happy to work through the numbers with you.
It’s not just your salary: all sources of income count
It is also important to note that the £100,000 threshold does not apply only to your employment salary. HMRC calculates your ‘adjusted net income’ by combining all taxable income you receive, including:
- Employment salary and bonuses
- Dividend income
- Rental income
- Interest income from savings accounts or bonds
- Self-employment or sole-trader profits
- Income from partnerships or trusts
Many people do not realise this until they complete their Self-Assessment tax return, by which point the tax liability has already arisen. Proactive planning is therefore essential.
The frozen personal allowance: a stealth tax pulling in more people every year
The Personal Allowance has been frozen at £12,570 since April 2021 and is set to remain at this level until at least April 2031. Over the same period, wages and the cost of living have continued to rise, meaning that more professionals are being drawn into the £100,000 trap for the first time.
This is what economists refer to as ‘fiscal drag’: no headline tax rate has changed, and the structure of the system appears unchanged on the surface. However, by freezing thresholds while incomes rise, the effective tax burden on higher earners has increased substantially in real terms.
2.29 million
HMRC’s estimate of taxpayers earning above £100,000 by 2028/29 — up by almost half a million since 2024/25*
That is a significant and growing number of individuals who need to be thinking carefully about their tax position, many of whom may not yet realise that they are affected.
What can be done?
The encouraging news is that with the right planning in place, it is often possible to significantly reduce, or in some cases eliminate entirely, the impact of the loss of Personal Allowance and the 60% effective rate.
There are a number of well-established planning strategies that may be relevant, depending on your circumstances. One of the most powerful tools available to most individuals is making additional pension contributions, which can reduce your adjusted net income and restore your Personal Allowance – meaning a £1,000 pension contribution could cost as little as £400. Depending on your circumstances, there may also be scope to make use of your annual allowance to contribute more than you might expect.
Beyond pensions, there are various other planning strategies that may be worth exploring, which can play a role in managing your adjusted net income across all sources, whether that is salary, dividends, rental income, or savings interest.
It is important to note that every individual's situation is different, and the right approach will depend on your personal circumstances, employment structure, and wider financial goals. If your total income is approaching or has exceeded £100,000, speaking with a qualified independent financial planner sooner rather than later could make a meaningful difference to your tax position and overall financial plan.
Talk to George Smart
If your income is at or approaching the £100,000 threshold — or if you’re simply not sure whether you’re managing your tax position as efficiently as you could be — I would be glad to help you review your circumstances and explore your options.
Get in touch with Walker Crips Financial Planning →
This article is for general information purposes only and does not constitute personal financial advice. The scenarios and examples used are illustrative only and are not based on any individual’s circumstances. Tax rules depend on individual circumstances and may change. You should always seek regulated financial advice tailored to your own situation before making any decisions.
Source: Rathbones (https://www.rathbones.com/en-gb/wealth-management/media-centre/news-and-comment/100k-tax-trap-to-hit-2m-taxpayers)
