The phrase “£100k tax trap” refers to the reduction of your Personal Allowance once your adjusted net income exceeds £100,000.
Most taxpayers receive a Personal Allowance of £12,570, meaning they pay no Income Tax on this portion of their income.
However, once your income exceeds £100,000, your Personal Allowance starts to disappear.
For every £2 you earn above £100,000, you lose £1 of your Personal Allowance.
By the time your income reaches £125,140, your Personal Allowance has been completely removed.
Why Is It Called a Tax Trap?
Many people assume they only pay the 40% higher rate of Income Tax on earnings above £50,270.
However, between £100,000 and £125,140, losing your Personal Allowance means more of your income becomes taxable.
As a result, many people effectively pay around 60% Income Tax on this part of their earnings.
It isn’t an official tax rate. It’s simply the combined effect of:
paying 40% Income Tax on additional earnings; and
paying tax on income that would previously have been covered by your Personal Allowance.
Example:
Suppose your salary increases from £100,000 to £101,000.
That extra £1,000 means you lose £500 of your Personal Allowance.
Because that £500 is no longer tax-free, it is taxed at 40%.
So you pay:
40% tax on the extra £1,000 (£400)
plus 40% tax on the lost £500 allowance (£200)
Total Income Tax: £600.
That works out to an effective Income Tax rate of 60% on the additional income.
National Insurance may also apply separately.
Who Does the £100k Tax Trap Affect?
The tax trap mainly affects:
higher earners receiving pay rises
employees receiving annual bonuses
company directors
self-employed people with profits over £100,000
anyone with adjusted net income above £100,000
Many people don’t realise they have entered this income range until they receive a larger tax bill or notice their tax code has changed.
Can You Avoid the £100k Tax Trap?
You cannot avoid the rules themselves, but many people legally reduce their adjusted net income.
Common options include:
making additional pension contributions
Gift Aid charitable donations
salary sacrifice arrangements where available
Reducing your adjusted net income below £100,000 may allow you to keep some or all of your Personal Allowance.
Because everyone’s circumstances are different, it’s worth seeking professional advice before making significant financial decisions.
Common Misunderstandings
There is a 60% tax band.
False. There is no official 60% Income Tax band. The higher effective rate comes from losing your Personal Allowance.
I lose all of my Personal Allowance immediately.
No. It reduces gradually by £1 for every £2 earned above £100,000.
Everyone earning over £100,000 pays exactly 60%.
Not necessarily. National Insurance, pension contributions, Gift Aid and other factors can affect your overall tax position.