Personal Allowance Reduction: The £100,000 Tax Trap Explained
Earning over £100,000 triggers a little-known rule that can push your effective marginal tax rate to 60% — higher than even the 45% additional rate. This guide from Filing Accounts UK explains exactly how the personal allowance taper works, with worked examples, using only verified facts from HMRC guidance.
At Filing Accounts, we help individuals and directors plan around this threshold. For the full picture of UK income tax bands, see our 40% tax bracket guide.
How the Personal Allowance Taper Works
The standard personal allowance — £12,570, letting most people earn that amount tax-free — begins to taper away once your adjusted net income exceeds £100,000. Adjusted net income is your total taxable income minus certain deductions, such as pension contributions and Gift Aid donations.
- Reduction rate: £1 of allowance lost for every £2 of adjusted net income over £100,000
- Full withdrawal point: £125,140 (£100,000 + 2 × £12,570) — at or above this, the allowance is zero
This taper is set out in Section 35 of the Income Tax Act 2007.
Why It Creates a 60% Effective Tax Rate
Between £100,000 and £125,140, you’re paying 40% higher-rate tax on each additional pound and simultaneously losing tax-free allowance at the same time. The combined effect creates an effective marginal rate of 60% — higher than the 45% additional rate that applies above £125,140.
Worked Example
An employee earning exactly £100,000 keeps their full £12,570 personal allowance. If they then earn an extra £10,000 (bringing total income to £110,000):
- Allowance reduction: £10,000 ÷ 2 = £5,000
- New allowance: £12,570 − £5,000 = £7,570
- Tax on the extra £10,000 income: 40% = £4,000
- Tax on the £5,000 of lost allowance (now taxed at 40% instead of 0%): £2,000
- Total tax on that £10,000: £6,000 — a 60% effective rate
At £125,140 or above, the allowance is fully gone, and income is taxed from £0 within the applicable band — 45% above £125,140.
Ways to Manage the Taper
- Pension contributions — reduce adjusted net income directly, potentially restoring lost allowance while also attracting tax relief
- Gift Aid donations — also reduce adjusted net income for taper purposes
- Deferring bonuses or dividends — where genuinely possible, keeping income below £100,000 in a given tax year avoids the taper altogether
- Marriage Allowance — only available where a partner is a basic-rate or non-taxpayer, so it doesn’t help once you’re in this band yourself, but may help a lower-earning partner
- ISA investments — generate tax-free income that doesn’t count towards adjusted net income
Company directors drawing dividends should pay particular attention here, since dividend income counts toward adjusted net income and can push total earnings into the taper zone even where salary alone would not.
Common Mistakes to Avoid
Not Realising the Effective Rate Exceeds the Additional Rate
Many assume 45% is the highest marginal rate in the UK system — the £100k–£125,140 band is actually higher, at 60%.
Forgetting Dividends Count Toward the Threshold
Directors combining salary and dividends can be caught out if the combined total crosses £100,000, even if neither figure alone looks close to it.
Not Planning Pension Contributions in Advance
Pension contributions need to be made within the relevant tax year to affect that year’s adjusted net income — late planning limits your options.
Frequently Asked Questions
At what income does the personal allowance start reducing?
Once adjusted net income exceeds £100,000.
At what income is the personal allowance completely gone?
£125,140.
Why is the effective tax rate 60% in this band?
Because you pay 40% tax on the income itself, while simultaneously losing £1 of tax-free allowance for every £2 earned — the combined effect is a 60% marginal rate.
Can pension contributions restore my personal allowance?
Yes — by reducing your adjusted net income below £100,000, or reducing how far into the taper you fall.
Planning Around the £100k Trap? Talk to Filing Accounts UK
At Filing Accounts, we help individuals and directors plan salary, dividends, and pension contributions around this threshold, so a pay rise or bonus doesn’t quietly cost you more than expected.
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