When you’re earning good money, it’s easy to think you’ve also got a handle on your tax situation. You’ll likely know your salary, tax code, and a rough figure of how much tax you should be paying, but the actual amount of money you’re losing in taxes could be higher than expected. This is the 100k “tax trap“, and it catches out a lot of high earners.
What many people do not realise is that once income crosses £100,000, something changes in the UK tax system that pushes the effective rate of tax to 60%.
In many cases, nobody tells you, and it happens without even realising. It’s not always obvious on your payslip because on the surface, nothing changes. As your annual income pushes beyond £100,000, you begin to lose your tax-free allowance. So, whilst the percentage of tax you’re paying looks the same on paper, the actual amount of tax you end up paying may be far higher.
At ANY Accounting & Bookkeeping Services, we’re here to help you spot and avoid this potential tax trap.
What is the £100,000 Tax Trap?
Most UK taxpayers receive a Personal Allowance. This is the amount of income you can earn each year without paying any income tax at all. For the 2025/26 tax year, the standard Personal Allowance is £12,570.
Once your adjusted net income exceeds £100,000, HMRC begins to reduce that allowance. For every £2 you earn above £100,000, you lose £1 of your Personal Allowance. By the time your income reaches £125,140, you’ve lost your tax-free allowance entirely and will be taxed on your entire income.
This is what creates a 60% effective tax rate. In this income band, you are already paying 40% higher-rate income tax on every additional pound earned. At the same time, every £2 you earn above 100k is losing you £1 of personal allowance. That £1, which was previously tax-free, now becomes taxable at 40%. Combined, you are paying 60% income tax on every pound earned between £100,000 and £125,140. If you also pay National Insurance, you’ll have to add up to 2% on top of that. This means that for some people, the combined marginal rate could be as high as 62%.
This is how high earners get caught out and end up paying far more tax than they think they are. On your pay slip, you’ll still be taxed at a normal rate, but you’ll be taxed on every pound you earn – no tax-free allowance.
When you add it all up, for every £1 you’re making between the £100-125k threshold, some people could end up giving up as much as 62p in taxes and NI contributions.
Why Are More People Being Caught by the £100k Tax Trap?
The £100,000 threshold was first introduced in April 2010 but since then, it’s never been increased. Meanwhile, wages have risen with inflation, but the tax threshold hasn’t been changed to reflect that. In 2021, the government agreed for freeze this threshold until at least 2030/31, meaning this isn’t going to change any time soon.
The result is fiscal drag: more people are being pulled into the tax trap every year, not because of a huge salary increase, but just because their earnings have grown whilst the threshold has stayed still.
Most people don’t even realise they are affected until they receive an unexpected tax bill, see their tax code change without explanation, or sit down with an accountant for the first time.
How Do You Tell if You’re Caught by the 100k Tax Trap?
There are a few ways that people can get caught in the 100k tax trap without even realising.
Here are some signs to look out for that could let you know you’re caught in the 100k tax trap:
- A salary rise or promotion takes your gross pay just over £100,000
- A bonus lands in the wrong month and pushes your annual income over the threshold
- Dividend income from a limited company tips your annual total above £100,000
- Your PAYE tax code is suddenly changed mid-year without explanation
- You prepare a tax return, and the bill is larger than expected
- Your Child Benefit starts being clawed back
- Someone else mentions the £100,000 tax trap to you and you’ve never heard of it
In some cases, people can go years without realising they’re paying more tax than necessary. By keeping a lookout for the warning signs of being in the 100k tax trap, you can be prepared and contact your accountant to help you avoid overpaying taxes.
How Can I Avoid the Tax Trap?
The good news is that the £100,000 tax trap is not unavoidable – for most people, the impact of the trap can be reduced or minimised with careful planning. With the help of a skilled accountant, you can manage your adjusted net income so that it remains below the threshold. This will allow you to keep your full Personal Allowance and substantially reduce your overall tax liability.
Some top strategies to avoid falling into the tax trap include:
Pension Contributions
Making pension contributions – either through salary sacrifice or personal contributions with basic rate relief – will reduce your adjusted net income. For someone earning £110,000, a pension contribution under relief at source of £10,000 (grossed up to £12,500 with basic rate tax relief) can bring adjusted net income back to £100,000, letting you keep your full Personal Allowance. Pension contributions can also be carried forward from the previous three tax years if your past annual allowances have not been fully used, meaning if you’ve been in the tax trap without realising it for a few years, you can offset some of your past overpayments.
Gift Aid Donations
Charitable donations made under Gift Aid reduce your adjusted net income in the same way pension contributions do. A net donation of £4,000 to charity is grossed up to £5,000 by HMRC, reducing your adjusted net income by that amount. If you’re just over the threshold, this can bring your income back below £100,000.
Timing of Bonuses and Variable Income
Sometimes you may have a degree of flexibility and be able to choose when a bonus is received or when dividends are drawn. You can time that income across two tax years, so it doesn’t all land in one, making your adjusted net income for that tax year lower. For example, if you know your income is close to the 100k mark, you could ask your employer to delay a bonus until May rather than paying you before April during the past tax year.
Salary Sacrifice
Beyond pension contributions, salary sacrifice arrangements for other benefits such as electric vehicles through company car schemes or cycle-to-work schemes can also reduce your gross taxable pay.
There’s plenty of ways to lower your adjusted net income to reduce the effects of the 100k tax trap. The right approach depends entirely on individual circumstances. At ANY Accounting, we’ll work with you to tailor the right plan for you, taking your other long-term financial goals into consideration.
Do You Need to File a Self-Assessment Return Even on PAYE?
Potentially. Once your adjusted net income exceeds £100,000, HMRC may require you to complete a Self-Assessment tax return, even if all your income is collected through PAYE. Many people in this position assume their employer is handling everything through payroll. In some cases, your employer hasn’t handled everything, and you only learn you’ve underpaid on your taxes when it comes time for your tax return.
If you have not previously registered for Self-Assessment and your income has recently moved above £100,000, contact us and we’ll be able to help guide you through this process.
How ANY Accounting & Bookkeeping Services Can Help
The £100,000 tax trap can lead to you paying far more tax than necessary without even knowing about it. At ANY Accounting, we can help you plan your finances to avoid paying more than necessary.
We take a holistic approach to financial management, and we’ll support you throughout the year, reviewing your position periodically ahead of time rather than just at the end of the tax year, helping prevent nasty surprise tax bills.
If you have seen your income approach or cross £100,000 – either through salary, bonus, dividends, rental income, or any combination of these – get in touch with our team today and let’s have a conversation to help you get out of the tax trap.
