Understanding the £100,000 Income Trap (and How to Escape It)
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For many high‑earning UK earners, surpassing the £100,000 income threshold may feel like a financial milestone, but it also creates a surprising and unwelcome tax liability known as the “income trap”.
What is the £100k income trap?
When your adjusted net income (total taxable income minus pension contributions and gift-aid donations) exceeds £100,000, your personal allowance (£12,570 in 2024/25) begins to shrink at a rate of £1 lost for every £2 earned above the threshold. By the time income reaches £125,140, your personal allowance is reduced to zero, so every penny you earn above £100,000 between those figures is subject to a marginal tax rate of 60%, comprising 40% income tax plus a 20% effective loss of allowance.
Why it matters
You take home less of each additional pound earned in that range, just 40p for every £1, thanks to the extra 20p that goes toward disappearing allowance.
Many reach the £100k threshold while consciously avoiding further earnings for this reason
Families especially those requiring childcare often lose benefits like free childcare or tax-free childcare vouchers if household income surpasses £100k. Unlike the gradual tapering of your Personal Allowance, the loss of this benefit happens at a cliff-edge, once your income crosses the threshold, the entire benefit is lost immediately
Who is affected?
According to HMRC, nearly 885,000 individuals lost their full personal allowances in 2024–25, and more than 1 million will be affected by 2027–28 due to frozen income tax thresholds.
A recent FT article described how many “Henrys” High Earners, Not Rich Yet feel the disincentive to earn more, questioning why a modest pay rise might leave them worse off financially.
How to reduce the trap: Smart tax planning
While the tax rules are fixed, a few strategies can reduce or even eliminate the impact of the £100k income trap
a) Pension contributions
Making additional pension contributions can reduce your adjusted income below £100,000, restoring some or all of your personal allowance
b) Salary sacrifice or benefits
Non-cash benefits like childcare vouchers or private medical insurance via salary sacrifice can reduce your taxable pay
Other reliefs, such as charitable giving with Gift Aid, can also help reduce adjusted income.
Broader consequences: childcare, benefits and fiscal drag
The consequences go beyond tax alone:
· Many lose access to up to £2,000 per child per year in tax-free childcare, as well as 15 hours per week of free childcare, disproportionately hitting families
· Apart from tax changes, this income band causes a loss of state benefits and compound fiscal drag, where frozen thresholds push more people into higher effective rates
· Disincentivised earnings and progression, A 60% marginal tax rate discourages extra work, overtime, and promotions, reducing productivity and career growth
· Unfair tax burden,those earning just over £100k face a higher effective tax rate than some higher earners, undermining fairness and public trust in the system.
Key takeaways for those approaching £100,000 of earned income
Assess your total adjusted income (after reliefs) to see if you’re near the £100k threshold.
Consider maximising pension contributions, particularly via salary sacrifice if your employer will allow this
Explore charitable donations
Engage early with professional advice
If you’re approaching the £100k mark, or already above it, the 60% marginal rate is not something you should ignore. Thoughtful planning, such as pension contributions or salary restructuring, can mean the difference while allowing you to plan for your future objectives. As thresholds remain frozen, more high earners will experience this trap, plan now to avoid paying for it later.