The £100,000 Tax Trap: Why Your Effective Tax Rate Can Reach 60%
Most people understand the basic idea of Income Tax.
As your income rises, some of your income can move into a higher tax band.
But there is an unusual part of the UK tax system that can make income between £100,000 and £125,140 particularly expensive.
It is commonly referred to as the £100,000 tax trap or 60% tax trap.
For the 2026/27 tax year, the standard Personal Allowance is £12,570.
Once your adjusted net income exceeds £100,000, that allowance begins to reduce.
For every £2 of adjusted net income above £100,000, you lose £1 of Personal Allowance.
At £125,140, the standard Personal Allowance has disappeared completely.
For taxpayers in England, Wales and Northern Ireland, the result can be an effective 60% marginal Income Tax rate on part of the income earned within this range.
The short answer
If your adjusted net income rises above £100,000, you can effectively be taxed twice on part of the increase.
You pay 40% higher-rate Income Tax on the additional income, while at the same time losing part of the £12,570 Personal Allowance.
That withdrawn allowance causes more of your existing income to become taxable as well.
The combined effect creates an effective marginal Income Tax rate of 60% through the relevant band for taxpayers subject to the main UK rates.
This is not a separate official “60% Income Tax band”.
It is the result of the interaction between the 40% higher rate and the withdrawal of the Personal Allowance.
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This article expands on our latest Merranti video, where Jason explains why earning between £100,000 and £125,140 can create a much higher effective tax rate than many people expect.
Watch more accounting, tax and business videos from the Merranti team on TikTok.
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How does the £100,000 Personal Allowance taper work?
For 2026/27, the standard Personal Allowance is £12,570.
This is normally the amount of income an individual can receive before paying Income Tax.
However, once adjusted net income exceeds £100,000, the allowance starts reducing.
The rule is:
You lose £1 of Personal Allowance for every £2 your adjusted net income exceeds £100,000.
For example, if adjusted net income reaches £110,000, you are £10,000 above the threshold.
That reduces the Personal Allowance by £5,000.
If adjusted net income continues rising, the allowance continues falling until it reaches zero at £125,140.
Where does the 60% effective rate come from?
Consider an additional £100 of income while you are within the Personal Allowance taper.
For a taxpayer in England, Wales or Northern Ireland, that £100 can be subject to 40% higher-rate Income Tax.
That initially creates £40 of tax.
But the additional £100 also causes £50 of Personal Allowance to be withdrawn because the allowance reduces by £1 for every £2 of additional adjusted net income.
That extra £50 becomes taxable at 40%.
That creates another £20 of Income Tax.
So on the additional £100:
£40 comes from the normal higher rate.
£20 comes from losing £50 of Personal Allowance.
Total additional Income Tax: £60.
That is why this section of income is commonly described as having a 60% effective marginal Income Tax rate.
It is a marginal rate, not a 60% tax bill on all your income
This distinction is important.
Someone earning £110,000 is not paying 60% Income Tax on the entire £110,000.
The 60% figure relates to the effective marginal rate on income falling within the Personal Allowance withdrawal range.
Your overall effective tax rate across all of your income will be lower.
The unusual rate exists because additional income both attracts Income Tax and removes tax-free Personal Allowance.
What is adjusted net income?
The £100,000 threshold is based on adjusted net income, rather than simply the headline salary figure.
That distinction can matter.
Broadly, adjusted net income starts with total taxable income and makes certain adjustments.
For some taxpayers, pension contributions and charitable donations made under Gift Aid may affect the adjusted net income calculation.
This is one reason tax planning can become particularly relevant as income approaches £100,000.
The precise treatment depends on your circumstances, so higher earners should avoid assuming that their salary alone determines whether the taper applies.
Why business owners need to pay attention
Limited company owners can sometimes have more control over the timing and form of income than a conventional employee.
For example, they may receive a combination of salary, dividends and other income.
That does not mean there is automatically a simple way around the Personal Allowance taper.
But it does mean decisions about extracting income from a company should ideally be considered before the income is taken.
An owner who needs additional personal cash may simply decide to take more income.
However, if that pushes adjusted net income into or further through the Personal Allowance taper, the tax consequences may be greater than expected.
The important point is to understand the numbers before making the decision.
Pension contributions may be relevant
Pension contributions can sometimes form part of planning for individuals whose adjusted net income is around the £100,000 threshold.
Depending on the type of pension contribution and the individual’s circumstances, contributions can affect adjusted net income.
That may potentially help preserve some or all of the Personal Allowance.
However, pension planning should not be undertaken purely because of a headline tax rate.
You need to consider contribution limits, pension rules, cash requirements and wider financial objectives.
Where the sums are significant, appropriate tax and financial advice should be taken.
Gift Aid can also affect adjusted net income
Qualifying charitable donations made through Gift Aid can also affect the adjusted net income calculation.
Again, this does not mean somebody should make a donation simply to reduce a tax bill.
The donation still involves giving money away.
But if you are already making charitable donations, it is worth ensuring they are correctly recorded and considered when your adjusted net income is calculated.
Why planning needs to happen before year end
One of the biggest problems with tax planning is timing.
If you discover after the tax year has ended that your adjusted net income was £105,000, £115,000 or £125,000, many of the decisions that might have been available during the year may no longer be available in the same way.
That is why higher earners should monitor their position before the year end rather than simply waiting for their tax return to be prepared.
Relevant income might include salary, bonuses, dividends, property income and other taxable income.
A particularly strong year in one part of your finances could push adjusted net income over £100,000 unexpectedly.
Do not turn down profitable income purely because of the tax rate
A 60% effective marginal rate sounds severe.
But tax should not automatically dictate every commercial decision.
If an opportunity genuinely improves your financial position, refusing it simply because some of the additional income will be taxed may not make sense.
The better approach is to understand the tax consequences and then consider whether there are legitimate planning options.
The question should not simply be:
“How do I avoid earning over £100,000?”
It should be:
“If my income is going to exceed £100,000, what should I be considering before the tax year ends?”
That produces a much more useful conversation.
Scotland is different
Scottish Income Tax rates on earnings, pensions and most other non-savings income are different from the rates in England, Wales and Northern Ireland.
For 2026/27, Scotland has separate starter, basic, intermediate, higher, advanced and top rates.
The Personal Allowance withdrawal above £100,000 still applies, but the interaction with the Scottish rates means the effective marginal calculation can differ.
Scottish taxpayers should therefore use the Scottish Income Tax rules rather than assuming the standard 60% example applies to them.
What should you do if your income is approaching £100,000?
The first step is to estimate your adjusted net income for the entire tax year.
Do not look only at monthly salary.
Consider the wider picture, including bonuses, dividends, property income and other taxable income.
Then speak to your accountant early enough to understand what options may genuinely be available.
For business owners in particular, this is much more useful than waiting until the accounts or Self Assessment tax return are being prepared.
Speak to Merranti before the year end
If your income is approaching or exceeding £100,000, understanding the Personal Allowance taper can help avoid an unexpected tax position.
Merranti can help business owners and individuals review their income position, understand the tax implications and consider legitimate planning opportunities before decisions are made.
Watch more from Merranti
This article expands on one of our latest short videos.
For more straightforward explanations of UK tax, accounting and business issues, watch more from the Merranti team on TikTok.
Written by Jenny Seaford ACPA
Senior Accountant, Merranti Accounting
Jenny is a Senior Accountant at Merranti Accounting, working with businesses and individuals on their accounting requirements and helping clients maintain clear financial information when making tax and business decisions.
