If you are earning between £100,000 and £125,140 you need to know about the ‘£100k tax trap’. But what is it? What effect does it have on your take home pay and benefits? And what can you do about it?
What is the UK’s £100k tax trap?
The £100k tax trap refers to the amount of tax that applies when your income goes just over £100,000. It’s not an official tax rate, but a side effect of how Personal Allowance is withdrawn.
In the UK, for 2024/25, income is taxed as follows:
Band | Taxable income | Tax rate |
Personal allowance | Up to £12,570 | 0% |
Basic rate | £12,571 to £50,270 | 20% |
Higher rate | £50,271 to £125,140 | 40% |
Additional rate | over £125,140 | 45% |
In the UK, everyone gets a Personal Allowance – the amount of income you can earn tax-free. For 2024/25, it’s £12,570. Once your income exceeds £100,000, you start to lose your Personal Allowance at a rate of £1 for every £2 of income over £100,000. This means your Personal Allowance is fully removed once you earn £125,140.
The ‘£100k tax trap’ is called a ‘trap’ because it creates an effective marginal tax rate of 60% on income between £100,000 and £125,140:
- You pay 40% Income Tax (as you’re in the higher rate band)
- Plus, for every extra £1 you earn in this range, you lose 50p of tax-free allowance, costing you another 20% of tax on that 50p
- So, 40% + 20% = 60% effective tax rate.
For example:
Earn £100,000: keep your full Personal Allowance.
Earn £101,000: you lose £500 of your Personal Allowance.
That means:
- You pay 40% tax on the extra £1,000 = £400
- And you pay 20% tax on the now-taxable £500 (from Personal Allowance) = £100
- Total tax = £500 on £1,000 income = 50% effective rate
- But as you go further into that band, it climbs towards 60%
What benefits do you lose over 100k?
For parents of children in childcare, the ramifications of earning over £100k can be even more extreme.
If you or your partner earn over £100k you immediately lose entitlement to:
- Tax-free childcare for children 11 and under
- Free early education and childcare for children 9 months-4 years
Each of these are worth thousands of pounds to families and leave them worse off than if they earnt just under the £100k threshold. For this reason, it is sometimes called the ‘£100k cliff edge’.
Laura Suter, head of personal finance at AJ Bell, reported in IFA Magazine:
‘Parents in areas where childcare is most expensive will be hit hardest, as those 30 free hours a week will cost far more. Someone in inner London, where costs are highest, who is claiming for two children will lose a benefit worth £23,300 a year just in free childcare hours. On top of that they lose their entitlement to tax-free childcare, which is worth up to £2,000 per child each year. It means that when one parent gets a pay rise taking them over that £100,000 limit, they lose £27,300 of entitlement in an instant.’
Is it worth earning over £100k?
This may lead many to question whether it is worth earning over £100k. The Telegraph reported on high earners tuning down £100k salaries, working part-time and taking more holiday in order to avoid falling into the £100k trap.
Without financial planning, on paper, it is not worth earning more. Ian Futcher from the wealth manager Quilter said to the Times: ‘It shouldn’t be the case that people are forced to cap their income just to avoid punitive tax consequences. It dampens ambition and punishes progression.’
However, at Women’s Wealth we believe passionately in 1) a growth money mindset and 2) strategic financial planning. We never want our clients to set a limit on what they can earn or achieve and we want to help them make the most of their resources. The combination of these can make earning over £100k financially and professionally worthwhile.
How to be tax efficient over £100k
There are a number of financial planning strategies that allow you to earn over £100k but avoid the tax trap. Even though your total taxable income may be over £100k, if you can reduce your adjusted net income to below £100k you will not lose your personal allowance or your childcare benefits.
Make additional pension contributions
Making additional pension contributions will reduce your adjusted net income. You can use this strategically to bring your adjusted net income below £100k.
For example: if you earn £110,000 and contribute £10,000 gross to a pension, your adjusted net income becomes £100,000.
Make additional Gift Aid donations
Donations to UK-registered charities under Gift Aid can also reduce your adjusted net income. You must fill out the donation on your Self Assessment tax return to claim the additional tax benefit.
For example: if you earn £110,000 and donate £8,000 to charity via Gift Aid, your donation is grossed up by 20% (basic rate of tax) to £10,000 and your adjusted net income is now £100,000. In addition to this, you will also get £2,000 tax relief (an additional 20% of £10,000) as a 40% taxpayer.
For both of these, you don’t need to limit your earnings, you don’t lose your childcare benefits, and you are either investing for your future self or giving money to causes you care about (both great for your financial wellbeing). It’s a win, win, win!
Conclusion
The £100k tax trap may be a harsh quirk of the UK tax system, but it doesn’t have to be a barrier to your financial or professional growth. While the loss of Personal Allowance and childcare benefits can make a pay rise seem counterproductive, with smart planning you can stay in control of your income and your future.
By understanding your adjusted net income and using tools like pension contributions and Gift Aid donations, you can avoid the most punishing aspects of the trap – without having to turn down opportunities or cap your earning potential.
At Women’s Wealth, we believe your goals shouldn’t be dictated by tax thresholds. With the right financial strategy, you can continue to grow your income, protect your benefits, and build a future that reflects your ambition and values.
If you’d like to talk to us about how to make the most of your money – whatever you earn – please book a discovery call with us.