How the £100,000 Tax Trap Works

Scope disclaimer: This article applies to England, Wales, and Northern Ireland. Scottish income tax rates differ, but the Personal Allowance taper still applies.

TL;DR

• The £100,000 tax trap is caused by the loss of the Personal Allowance
• Allowance reduces by £1 for every £2 earned over £100,000
• It is fully lost at £125,140
• This creates a 60% effective marginal tax rate
• Planning actions must occur before the tax year ends

£100,000 Tax Trap

The £100,000 tax trap occurs when an individual’s income exceeds £100,000, triggering the withdrawal of the Personal Allowance at a rate of £1 for every £2 earned, resulting in an effective marginal tax rate of 60% until the allowance is fully lost.

£100,000 Tax Trap – At-a-Glance Comparison

Thresholds are set by HM Revenue & Customs and frozen until at least April 2028.

Why the £100,000 Tax Trap Exists

The UK income tax system combines:

• Progressive tax bands
• A means-tested Personal Allowance

Once income exceeds £100,000:

• Higher-rate tax (40%) still applies
• Plus loss of tax-free income (20% effect)

This creates a temporary but severe spike in marginal tax.

Example Calculation

Inputs

• Salary: £110,000

Calculation

• £10,000 over £100,000
• Personal Allowance reduced by £5,000
• Extra tax:
  • £10,000 × 40% = £4,000
  • £5,000 × 20% = £1,000

Outcome

• Total tax on £10,000 = £6,000
• Effective marginal rate: 60%

National Insurance excluded.

Who Is Most Affected by the £100,000 Tax Trap?

This issue disproportionately affects:

• Senior professionals and directors
• Dual-income households with bonuses
• Contractors moving into PAYE roles
• Individuals with taxable benefits

Many enter the trap accidentally due to bonuses or benefit-in-kind valuations.

Is This Financially Worth Addressing?

Addressing the £100,000 tax trap is financially worthwhile if:

• You are between £100,000 and £125,140
• You have control over income timing
• You can act before 5 April

Risks of inaction:

• Paying 60% marginal tax unnecessarily
• Losing eligibility for childcare benefits
• Reduced net income despite higher gross pay

Common Mitigation Strategies (High-Level)

This article is explanatory, not advisory. Common planning concepts include:

• Pension contributions
• Gift Aid donations
• Adjusting bonus timing
• Salary sacrifice (where available)

Each has eligibility rules and trade-offs and must be assessed individually.

How This Relates to Income Tax Calculators

Basic income tax calculators often:

• Show higher tax but not why
• Fail to highlight the allowance taper
• Understate marginal impact

Understanding the £100,000 tax trap explains sudden drops in take-home pay and improves trust in calculator outputs.

People Also Ask (PAA) & FAQs

Why is tax 60% between £100,000 and £125,140?

Because each £2 earned removes £1 of tax-free income. Combined with 40% higher-rate tax, this creates a 60% effective marginal rate.

Does National Insurance apply on top of the tax trap?

Yes. Employee National Insurance at 2% still applies above the Upper Earnings Limit, increasing the real marginal deduction further.

Is the £100,000 tax trap temporary?

Yes. Once income exceeds £125,140, the Personal Allowance is fully withdrawn and the marginal rate drops back to 45%.

Can HMRC automatically apply mitigation?

No. HMRC applies tax rules mechanically. Mitigation must be actioned by the taxpayer before the tax year ends.

Does the tax trap affect childcare benefits?

Yes. Adjusted net income over £100,000 removes eligibility for Tax-Free Childcare and 30 free hours, compounding the impact.

Is the £100,000 threshold changing?

No. The threshold is currently frozen until at least April 2028, increasing exposure over time through fiscal drag.

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