The £100,000 Tax Trap: Why Earning More Could Leave You Worse Off

Understanding the £100,000 Tax Trap in the UK

Earning £100,000 or more is often seen as a sign of career success. However, in the UK tax system, crossing this threshold can trigger a series of hidden costs that significantly reduce your take-home pay. This is why the £100,000 income level is commonly referred to as a “tax trap”.

Many professionals choose to decline pay rises, turn down promotions, or reduce working hours to avoid crossing this line. Below, we explain exactly why earning over £100,000 can be financially inefficient without proper planning.

Loss of Personal Allowance After £100,000

Most UK taxpayers benefit from a personal allowance of £12,570, meaning income up to this amount is tax-free. However, once your adjusted net income exceeds £100,000, this allowance starts to reduce.

For every £2 earned above £100,000, £1 of your personal allowance is withdrawn.
For example, if your adjusted net income is £110,000, your personal allowance falls to £7,570.

Once income reaches £125,140, the personal allowance is completely lost, and tax is charged from the first pound earned.

Why the Effective Tax Rate Becomes 60%

Between £100,000 and £125,140, taxpayers face an effective income tax rate of 60%. This happens due to the combination of:

• 40% higher-rate income tax

• Gradual removal of the personal allowance

When you add:

• 2% National Insurance

• Student loan repayments (9% or 15%, where applicable)

…the real take-home pay can fall dramatically. This makes the £100,000–£125,140 income band one of the most heavily taxed in the UK.

Once income exceeds £125,140, the marginal tax rate drops to 45%, which is lower than the effective rate within the tax trap.

Loss of Free Childcare Benefits

Working parents may qualify for 30 hours of free childcare per week for children aged nine months to four years. However, this benefit is only available if neither partner earns more than £100,000.

Once this threshold is breached, free childcare is lost entirely, often increasing annual childcare costs by thousands of pounds.

Loss of Tax-Free Childcare Support

In addition to free childcare, eligible parents can benefit from the Tax-Free Childcare scheme, which provides:

• Up to £2,000 per child per year

• Up to £4,000 for a disabled child

The Government contributes £2 for every £8 parents pay into a childcare account. However, this support also ends when either partner’s income reaches £100,000.

How to Avoid the £100,000 Tax Trap

Pension Contributions

One of the most effective ways to avoid the £100,000 tax trap is through personal pension contributions. These reduce your adjusted net income, potentially bringing it below the £100,000 threshold.

This strategy allows you to:

• Retain your full personal allowance

• Keep free childcare and tax-free childcare benefits

• Save for retirement in a tax-efficient way

Charitable Donations

Charitable donations made under Gift Aid can also reduce adjusted net income. This approach benefits both your tax position and the causes you support.

Final Thoughts

The £100,000 tax trap highlights why earning more doesn’t always mean taking home more. Without careful tax planning, higher income can lead to reduced allowances and lost benefits. Pension contributions and charitable giving can help protect your income and ensure your hard-earned money works more effectively.

Professional tax advice is strongly recommended if your income is approaching or exceeding £100,000.

Partner note: ITA 2007, s. 35; www.gov.uk/free-childcare-if-working/check-youre-eligible;  www.gov.uk/tax-free-childcare

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