All things being equal, a pay rise is a victory, but there is a £100000 Tax Trap. It signifies success. It usually means more money in the bank.
However, in the UK tax system, all things are not equal.
Recent press reports highlight a strange trend. Many professionals now turn down promotions. Others cut their hours. They do this specifically to avoid crossing the £100,000 income threshold.
Why is this happening? We explain the “Cliff Edge” and how you can navigate it.
Reason 1 – The Hidden 60% Tax Rate
Most people understand standard tax bands. However, few understand the hidden trap waiting at six figures.
Losing Your Personal Allowance
Every individual starts with a Personal Allowance of £12,570. You can earn this amount before you pay a penny in tax.
Crucially, this allowance is not guaranteed. Once your income hits £100,000, the rules change, and you fall into the £100000 Tax Trap.
How the Maths Works
The government reduces your Personal Allowance by £1 for every £2 you earn above £100,000.
- Example: You earn £110,000.
- The Calculation: Your income is £10,000 over the limit. Therefore, you lose £5,000 of your allowance.
- The Result: Your tax-free allowance drops to just £7,570.
Once your income hits £125,140, your Personal Allowance hits zero. You pay tax on every pound you earn.
How the allowance reduction works
For every £2 earned above £100,000, £1 of personal allowance disappears.
This continues until the allowance reaches zero.
At an income of £125,140, the allowance vanishes entirely.
You then pay tax from the first pound you earn.
Personal allowance reduction table
The table below shows why the £100,000 tax trap escalates quickly.
Personal allowance reduction table
| Adjusted Net Income | Allowance Lost | Remaining Allowance |
|---|---|---|
| £100,000 | £0 | £12,570 |
| £105,000 | £2,500 | £10,070 |
| £110,000 | £5,000 | £7,570 |
| £120,000 | £10,000 | £2,570 |
| £125,140 | £12,570 | £0 |
This continues until the allowance reaches zero.
At an income of £125,140, the allowance vanishes entirely.
You then pay tax from the first pound you earn.
The “Double Whammy” Effect
This reduction creates a painful marginal tax rate. You pay 40% tax on the extra income. Plus, you pay an extra 20% because you lose your tax-free allowance.
Consequently, the effective tax rate between £100,000 and £125,140 is 60%.
Add in 2% National Insurance and potential Student Loan deductions. Suddenly, you keep very little of your hard-earned raise. It is easy to see why extra hours often feel pointless.
Reason 2 – The Childcare Cliff Edge
For working parents, the situation is often worse.
You might receive valuable government support for childcare. However, this support stops abruptly at the £100,000 mark.
Loss of Free Hours
Parents currently receive 30 hours of free childcare per week. This applies to eligible children aged nine months to four years.
But beware. If just one parent earns an adjusted net income over £100,000, you lose this benefit entirely.
Loss of Tax-Free Top-Ups
The government also offers a Tax-Free Childcare scheme. They top up your childcare account by £2 for every £8 you save. This is worth up to £2,000 per year.
Like the free hours, you lose this immediately if you cross the £100,000 threshold.
Therefore, a small pay rise could increase your childcare bills by thousands. You could end up poorer than before.
How to Beat the System
You do not have to refuse a pay rise. You can earn over £100,000, avoid the £100000 Tax Trap, and keep your benefits.
The secret is managing your Adjusted Net Income.
Pension Contributions
This is the most efficient solution. You can make a personal pension contribution to lower your reported income.
- Scenario: You earn £110,000.
- Action: You pay £10,000 into your pension.
- Result: Your adjusted net income falls to £100,000.
Consequently, you regain your full Personal Allowance. You also keep your childcare benefits.
You still get the money; it simply waits in your pension pot for later.
Charitable Donations
You can also use Gift Aid. Charitable donations reduce your adjusted net income in the same way. This allows you to support a good cause and solve your tax problem simultaneously.
Final Words
Final Thoughts on the £100,000 Tax Trap
The £100000 Tax Trap does not mean you should earn less.
It means you should plan better.
Understanding the rule gives you control.
Ignoring it hands control to the tax system.
That choice matters.
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Final Final Words
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