The Personal Allowance Taper: How Earning Over £100,000 Can Mean a 60% Tax Trap

Most people assume the top rate of income tax in the UK is 45%. For a specific band of earners, that’s not true - between £100,000 and £125,140 of income, the effective marginal tax rate is 60%, rising to 62% once National Insurance is included. HMRC’s own forecasts suggest over 2 million people will fall into this in the 2026/27 tax year, the highest number on record. Here’s exactly why it happens and what you can do about it.

Why it happens

Everyone gets a tax-free Personal Allowance - £12,570 for 2026/27, frozen since 2021/22 and now confirmed frozen until April 2031. But once your ‘adjusted net income’ goes above £100,000, that allowance starts being withdrawn: you lose £1 of allowance for every £2 you earn above £100,000. By the time you reach £125,140, the entire £12,570 allowance is gone.

The trap is that losing the allowance doesn’t just cost you the tax on that slice of income once - it exposes income that used to be tax-free to 40% tax as well. That’s what creates the 60% effective rate.

A worked example

Say you earn £100,000 and receive a £20,000 bonus, taking you to £120,000:

• The £20,000 bonus itself is taxed at the normal 40% higher rate, costing £8,000 in Income Tax.
• But because your income has risen by £20,000 above the £100,000 threshold, your Personal Allowance is reduced by £10,000 (£1 for every £2 over £100,000) - from £12,570 down to £2,570.
• That extra £10,000 of income, which would previously have been tax-free, is now taxed at 40% too - an additional £4,000 in tax.
• Add employee National Insurance at 2% on income above the upper earnings limit - another £400.
• Total tax and NI on the £20,000 bonus: £12,400 - an effective rate of 62%. You keep £7,600 of a £20,000 bonus.

It’s not just salary - ‘adjusted net income’ catches more than you think

The £100,000 threshold is based on your adjusted net income, which includes salary, bonuses, rental income, dividends, savings interest, and most other taxable income sources - not just your headline salary. It’s possible to be caught by the taper even on a salary just under £100,000 if you have other income on top.

How to reduce or avoid it

The main lever most people can pull is increasing pension contributions, because pension contributions reduce your adjusted net income for this calculation:

• Salary sacrifice: reduces your gross salary directly, which reduces adjusted net income and can bring you back under £100,000 - while also saving National Insurance (see our separate article on how this works). Note that from 6 April 2029, the NI saving on amounts sacrificed above £2,000 a year will be capped, which will reduce (but not eliminate) the efficiency of this approach for larger contributions.
• Personal pension contributions: also reduce adjusted net income, though the relief has to be claimed rather than being automatic if your scheme is ‘relief at source’ (see our article on reclaiming higher-rate pension relief).
• Charitable donations via Gift Aid also reduce adjusted net income in the same way as pension contributions, and can be worth combining with pension planning for anyone close to the threshold.

Why more people are falling into it

The £100,000 threshold has never been increased since it was introduced in April 2010. Wages have risen substantially since then, so more people cross it every year purely through pay rises that haven’t kept pace with inflation - a similar ‘fiscal drag’ effect to the frozen personal allowance and higher-rate threshold more broadly. Industry estimates suggest the number of people affected will keep rising through the rest of the decade.

A word of caution on salary sacrifice as a fix

Salary sacrifice is currently one of the most effective ways to manage this, but it’s worth planning with an eye on the 6 April 2029 change to National Insurance treatment of salary sacrifice above £2,000 a year. It doesn’t remove the income-tax benefit of reducing adjusted net income, but it does reduce the NI saving on larger sacrificed amounts from that date.

The bottom line

If your income is approaching £100,000, or you’re expecting a bonus that will push you over it, it’s worth doing the maths before the money lands rather than after. A well-timed pension contribution can mean the difference between paying tax at 60% or getting full value from your income. Once your own pension and allowances are sorted, it’s also worth looking further afield - Junior SIPPs, for instance, let you get a 20% government top-up on contributions for your children too.