In the complex world of UK taxation, high earners often encounter unexpected challenges that can significantly impact their take-home pay. One such issue is the gradual withdrawal of the personal allowance once your income surpasses £100,000—a mechanism commonly referred to as the “£100k tax trap.” This rule can lead to an effective marginal tax rate as high as 60% on earnings between £100,000 and £125,140, catching many professionals off guard. If you’re a director, freelancer, or business owner navigating self-assessment or company accounts, understanding this taper is crucial for effective tax planning.

At Filing Accounts, we specialize in helping individuals and businesses with seamless company filings, tax returns, and financial advice tailored to UK regulations. In this in-depth guide, we’ll break down how the personal allowance taper works in 2026, illustrate its effects with real-world examples, and share strategies to mitigate its impact. Whether you’re filing your self-assessment or managing payroll, staying informed can save you thousands.

What Is the Personal Allowance and Why Does It Matter?

The personal allowance is the threshold of income you can earn each tax year without paying income tax. For the 2025/26 tax year (running from 6 April 2025 to 5 April 2026), the standard personal allowance remains frozen at £12,570, as confirmed by HM Revenue and Customs (HMRC). This means most people pay no tax on the first £12,570 of their earnings, with basic rate tax (20%) applying to income above this up to £50,270.

However, for higher earners, this benefit isn’t guaranteed. If your “adjusted net income” exceeds £100,000, the allowance begins to phase out. Adjusted net income includes your total taxable earnings minus certain deductions like pension contributions or charitable donations via Gift Aid. This taper ensures that by the time your income reaches £125,140, the personal allowance is completely eliminated.

For official details on income tax allowances, visit the GOV.UK page on Income Tax rates and allowances.

How the Personal Allowance Taper Mechanism Operates

The taper rule is straightforward yet powerful: for every £2 of adjusted net income over £100,000, your personal allowance decreases by £1. This creates a sliding scale where the allowance shrinks progressively until it’s gone.

• Threshold Start: £100,000 adjusted net income.
• Reduction Rate: £1 reduction per £2 over the threshold.
• Full Withdrawal Point: £125,140 (calculated as £100,000 + (2 x £12,570) = £125,140).

Once tapered, any remaining allowance is applied against your taxable income, pushing more of your earnings into higher tax bands. The real sting comes from the combined effect with the 40% higher rate tax band (which applies from £50,271 to £125,140). On the portion of income subject to taper, you’re effectively taxed at 60% because you’re losing the tax-free allowance while paying higher rate tax.

To put it in perspective:

• At £100,000 income: Full £12,570 allowance.
• At £110,000: Allowance reduced to £7,570 (reduction of £5,000).
• At £125,140 or above: Zero allowance.

This isn’t just theoretical—it’s embedded in UK tax law under Section 35 of the Income Tax Act 2007. For a deeper dive into the legislation, check HMRC’s guidance on personal allowances and reliefs.

The £100k Tax Trap: A Closer Look at the 60% Effective Rate

Why is this called a “tax trap”? Let’s crunch the numbers. Suppose your income is exactly £100,000. You benefit from the full personal allowance, paying 40% tax on income above £50,270 after the allowance.

Now, imagine earning an extra £10,000, bringing your total to £110,000. The taper kicks in:

• Reduction in allowance: £10,000 / 2 = £5,000.
• New allowance: £12,570 – £5,000 = £7,570.
• Additional taxable income: The extra £10,000 plus the £5,000 lost allowance (now taxed at 40%).

The net effect? On that £10,000 boost:

• 40% tax on £10,000 = £4,000.
• 40% tax on the £5,000 lost allowance = £2,000.
• Total tax on £10,000 = £6,000 (60% effective rate).

This marginal rate exceeds even the 45% additional rate (which starts at £125,141). It’s a disincentive for earnings in this bracket, affecting bonuses, salary increases, or dividend payouts for company directors.

For those with incomes fluctuating around this level—common for self-employed individuals or those with investment income—this can complicate tax forecasting. Use HMRC’s online tax calculator to estimate your liability based on current rates.

Real-Life Examples of the Taper in Action

To make this tangible, consider these scenarios for the 2025/26 tax year:

Example 1: Salaried Employee Earning £105,000

• Adjusted net income: £105,000.
• Taper amount: (£105,000 – £100,000) / 2 = £2,500.
• Remaining allowance: £12,570 – £2,500 = £10,070.
• Taxable income: £105,000 – £10,070 = £94,930.
• Tax breakdown: 20% on £37,700 (basic band) + 40% on the rest.
• Compared to £100,000: Extra £5,000 income leads to about £3,000 additional tax (60% effective).

Example 2: Company Director with £120,000 in Dividends and Salary

• Total income: £120,000 (assuming after corporation tax).
• Taper: (£120,000 – £100,000) / 2 = £10,000.
• Allowance: £12,570 – £10,000 = £2,570.
• Effective tax spike on the tapered portion.

Directors often face this when drawing dividends. At Filing Accounts, we assist with optimizing dividend strategies to minimize exposure—contact us for personalized advice.

Example 3: High Earner at £130,000

• Taper complete: Zero allowance.
• All income taxed from £0, with 45% on amounts over £125,141.

These examples highlight why proactive planning is essential. For more personalized calculations, refer to GOV.UK’s self-assessment helpsheet.

Strategies to Navigate and Minimize the £100k Tax Trap

While you can’t eliminate the taper, smart planning can reduce its bite:

1. Boost Pension Contributions: Payments into a pension (via salary sacrifice or personal contributions) reduce adjusted net income. For instance, contributing £10,000 could restore £5,000 of your allowance while gaining tax relief.
2. Gift Aid Donations: Charitable giving lowers your net income. A £8,000 donation (grossed up to £10,000 with basic relief) could offset taper effects.
3. Income Deferral: If possible, defer bonuses or dividends to the next tax year to stay below £100,000.
4. Spousal Income Shifting: Transfer assets or income to a lower-earning partner via allowances like the Marriage Allowance.
5. Investment Choices: Use ISAs or other tax-efficient vehicles to generate non-taxable income.

Always consult a professional—rules around reliefs can be nuanced. HMRC provides detailed advice on pension tax relief.

Conclusion: Stay Ahead of the Curve with Expert Guidance

The personal allowance taper represents a subtle yet significant hurdle for UK high earners in 2026, potentially eroding up to 60% of marginal income in the £100,000 to £125,140 bracket. By understanding its mechanics and employing mitigation strategies, you can protect your finances and optimize your tax position.

At Filing Accounts, we’re committed to simplifying UK tax compliance for individuals and businesses. Whether you need help with self-assessment filings, company accounts, or strategic tax advice, our team is here to guide you. Visit filingaccounts.co.uk today to learn more or schedule a consultation.

Remember, tax rules can change—always verify with official sources like GOV.UK or seek advice from a qualified accountant. Stay informed, plan wisely, and turn potential traps into opportunities.