The £100,000 Income Trap: Why Earning More Can Leave You Worse Off
Earning over £100,000 should feel like a major milestone.
But in the UK tax system, it comes with a hidden downside:
You can end up paying an effective tax rate of 60%.
This is known as the £100k income trap—and many people don’t realise they’ve fallen into it until it’s too late.
What is the £100k income trap?
Once your income exceeds £100,000, you start to lose your personal allowance.
For 2026/27, the personal allowance is:
- £12,570
But for every £2 of income above £100,000:
- You lose £1 of personal allowance
This continues until your allowance is completely gone at £125,140.
Why this creates a 60% tax rate
Here’s where it becomes expensive.
In this income band:
- You pay 40% higher rate tax
- AND lose tax-free allowance
The combined effect means:
Every additional £1 earned is effectively taxed at 60%
A simple example
Let’s say your income increases from £100,000 to £110,000.
You would:
- Pay 40% tax on the extra income
- Lose £5,000 of your personal allowance
That lost allowance is now taxed at 40% too.
Result:
- £10,000 extra income
- Around £6,000 lost in tax
Who is affected?
This trap commonly impacts:
- Business owners
- Company directors
- Senior employees
- Consultants and contractors
Especially those with:
- Bonuses
- Dividends
- Rental income
Why it’s often missed
Many people don’t plan for this because:
- It’s not obvious from standard tax rates
- It only affects a specific income band
- Income can fluctuate year to year
So you might:
Accidentally cross £100k—and trigger a much higher tax bill.
How to avoid the £100k trap
The key is reducing your taxable income, not necessarily your earnings.
1. Pension contributions (most effective)
Pension contributions are one of the best tools available.
They:
- Reduce your taxable income
- Restore your personal allowance
- Provide long-term savings
Example:
If your income is £110,000 and you contribute £10,000 to a pension:
- Your taxable income drops to £100,000
- Your full personal allowance is restored
2. Gift Aid donations
Charitable donations made under Gift Aid:
- Extend your basic rate band
- Reduce effective taxable income
This can help bring income back below £100,000.
3. Salary vs dividend planning
For company directors:
- Adjusting salary and dividends can help manage thresholds
- Timing income across tax years can be key
4. Spreading income across family
Where appropriate:
- Income-producing assets can be shared with a spouse
- Utilising multiple allowances and tax bands
(This must be done carefully and legitimately.)
5. Timing income
If possible, consider:
- Deferring income into the next tax year
- Accelerating expenses
This can help keep income below the threshold in a given year.
Why planning early matters
The biggest mistake is dealing with this after the tax year ends.
At that point:
- Your options are limited
- Opportunities are lost
The best results come from:
Planning before your income crosses £100,000.
Other hidden impacts
The £100k trap can also affect:
- Child Benefit (High Income Child Benefit Charge)
- Tax-free childcare eligibility
- Student loan repayments
This means the true effective tax rate can be even higher.
Final thoughts
Crossing £100,000 is a great achievement—but without planning, it can come with:
A surprisingly high tax cost.
The good news is:
- This trap is completely manageable
- With the right strategy, it can often be avoided entirely
Need help managing your tax position?
At Merranti Accounting, we help clients:
- Reduce exposure to the £100k tax trap
- Plan income and pensions efficiently
- Keep more of what they earn
