£100K Income Trap: How to Keep Your £12,570 Personal Allowance
For high earners, hitting £100,000 in income might feel like a milestone worth celebrating — but there’s a hidden tax sting many don’t see coming.
If your adjusted net income rises above £100,000, you begin to lose your personal tax-free allowance (£12,570). And between £100,000 and £125,140, you’re effectively taxed at a shocking 60% marginal rate on that band of income.
In this post, we explain:
- How the personal allowance taper works
- Why the real tax rate is much higher than it looks
- Strategies you can use to keep more of your income
📉 How the £100K Income Trap Works
From 6 April 2024, the standard personal allowance remains at £12,570. But once your adjusted net income goes over £100,000, you begin to lose £1 of personal allowance for every £2 of income over the threshold.
Here’s the key point:
- At £125,140, your personal allowance is fully removed.
- That’s a loss of £12,570 of tax-free income — costing you £5,028 in extra tax (at 40%).
This means your effective marginal rate on income between £100,000 and £125,140 is 60%:
- 40% income tax on that band
- Plus 20% tax from the lost personal allowance
🧠 Example:
Let’s say your income is £110,000:
You’re £10,000 over the £100,000 threshold.
You lose £5,000 of your personal allowance.
That’s £5,000 now taxed at 40% = £2,000 extra tax.
So the effective rate on that £10,000 is 60%.
💼 Who Does This Affect?
This trap primarily affects:
- Company directors who take large salaries or bonuses
- High-earning employees with income creeping above £100K
- Sole traders and landlords with strong profit years
- Anyone receiving a combination of income and benefits (e.g. rental income, dividends)
✅ Planning Strategies to Reduce Your Adjusted Net Income
The good news is that this trap can be avoided with the right financial planning. Here are three key strategies:
1. Make Pension Contributions
- Pension contributions reduce your adjusted net income.
- Contributions made personally (not via your company) extend your basic rate tax band and reduce the income that counts towards the £100K threshold.
- Bonus: You also get tax relief on the contributions.
💡 Tip: A gross pension contribution of £10,000 could restore your full personal allowance and generate a double tax saving.
2. Use Salary Sacrifice
- If your employer (or your own company) offers salary sacrifice, you can give up part of your salary in exchange for pension contributions, electric car leasing, or additional holiday.
- Since the sacrificed salary never counts as income, it helps keep you below £100,000.
- It also reduces your National Insurance costs.
💡 Particularly useful for director-shareholders planning their annual remuneration package.
3. Defer Income (e.g., Bonuses or Dividends)
- If you’re close to the £100K threshold at year-end, consider deferring a bonus or dividend until the next tax year (especially if your income is expected to drop).
- Timing can be key — just moving a payment by a few days (e.g., after 6 April) can restore your personal allowance for the current year.
🔍 Other Considerations
- Gift Aid donations also reduce adjusted net income — an often-overlooked strategy with dual benefit (supporting charity + tax planning).
- Claiming allowable expenses as a landlord or sole trader may also help bring income under the threshold.
📣 Final Word
If your income is approaching or already over £100,000, don’t wait until the tax return deadline to address it. By acting during the tax year, you may still have time to preserve your personal allowance — and avoid losing 60% of your income in a little-known tax trap.
🤝 Need Help with Tax Planning?
At Merranti Accounting, we help directors, landlords, and high earners take proactive steps to minimise tax, structure income efficiently, and protect their allowances.
Contact us today for a tax planning review and let’s keep more of your income working for you — not HMRC.
Merranti Accounting – Forward-Thinking Tax Strategy for High Earners
