The £100k Tax Trap Explained

The £100,000 income threshold creates one of the most unusual features of the UK tax system, often referred to as the “£100k tax trap.” This occurs because individuals with income above £100,000 begin to lose their Personal Allowance.

The Personal Allowance for the 2025/26 tax year remains £12,570. However, once income exceeds £100,000, the allowance is reduced by £1 for every £2 earned above this threshold.

This means the Personal Allowance is completely eliminated once income reaches £125,140.

The loss of the allowance creates an effective marginal tax rate of approximately 60% for income within this band. This occurs because individuals are simultaneously:

• Paying 40% higher rate tax

• Losing part of their tax-free allowance

For example, if someone earns £110,000, they lose £5,000 of their Personal Allowance. As a result, more of their income becomes taxable.

This issue affects many professionals, including company directors, consultants, and senior employees.

Fortunately, several strategies may help reduce exposure to the tax trap. These include:

• Making pension contributions

• Making charitable donations through Gift Aid

• Adjusting income timing where possible

Pension contributions are particularly effective because they reduce adjusted net income, which is the figure used to calculate Personal Allowance eligibility.

Understanding how the £100k tax trap works can help individuals plan their finances more efficiently and avoid unnecessarily high tax rates.