Caught out by the 100k tax trap? Here’s how to Navigate it

A six figure salary sounds like a milestone worth celebrating. But for many people, crossing the £100,000 threshold comes with an unwelcome surprise: your take home pay may not rise as much as you expect, and in some cases, it can even fall. This is the so called £100k tax trap, and understanding it is essential before planning how to use that new pay rise.

Hitting £100,000 is often seen as a financial high point. Yet once your income drifts above this level, an unusual quirk in the tax system kicks in. For every £2 you earn over £100,000, HMRC withdraws £1 of your tax-free Personal Allowance. By the time you reach £125,140, this allowance disappears entirely.

All of this happens while you are already paying 40% income tax, creating an effective marginal tax rate of 60% on earnings between £100,000 and £125,140 (and that’s before national Insurance is added). It’s not a separate tax rate, but the combined impact of losing your allowance and paying higher rate tax simultaneously.

The result? You earn more, but your take home pay grows far less than expected.

Aside from the high marginal tax rate, the £100,000 threshold has another important consequence: a household loses access to tax free childcare if either parent earns over £100,000. For families using the scheme, this benefit can be worth up to £20,000 a year, so crossing the threshold can significantly increase childcare costs.

In short: earn slightly more, and you may keep considerably less.

The good news is that there are fully legitimate ways to reduce your taxable income and retain your personal allowance, while often improving your longterm financial position.

1. Increase pension contributions

Pension contributions (including through salary sacrifice) reduce your taxable income. Not only does this help you avoid the tax trap, but it also boosts your retirement savings in a highly tax-efficient way.

2. Use salary sacrifice

Under salary sacrifice arrangements, you exchange part of your salary in return for benefits such as pension contributions, childcare vouchers, or cycle to work schemes. This can reduce both your income tax and national insurance.

3. Make Gift Aid donations

Charitable donations made under Gift Aid can extend your basic-rate tax band and reduce your adjusted net income, helping you reclaim part or all of your personal allowance.

If you earn £120,000 and sacrifice £20,000 into your pension, your taxable income falls back to £100,000. This restores your full personal allowance and avoids the 60% marginal tax band entirely.

Reducing your taxable income to £100,000 provides three major advantages:

• You regain your full £12,570 Personal Allowance
• You avoid the 60% marginal tax band
• You pay less income tax and national insurance overall

Meanwhile, your pension receives the full £20,000 gross, without income tax deductions — substantially boosting your longterm savings.

Note: Salary sacrifice rules and tax thresholds may change with future budgets.