Crossing the £100,000 income threshold is a notable achievement for many high-earning professionals. However, it can come with unexpected tax consequences. The gradual loss of the Personal Allowance introduces a stealthy yet significant burden: the £100k tax trap. This creates an effective marginal tax rate of 60% on income between £100,000 and £125,140, potentially costing thousands in additional tax.
For those looking to protect their income and maintain financial flexibility, understanding and navigating this tax trap through proactive, strategic planning is essential.
(Source: GOV.UK – Income Tax Rates and Allowances)
What is the £100,000 Tax Trap?
The £100,000 tax trap affects UK taxpayers earning between £100,000 and £125,140. For every £2 of income above £100,000, £1 of personal allowance is lost, creating an effective 60% marginal tax rate. Careful financial planning, such as pension contributions and salary sacrifice, could help reduce taxable income and reclaim lost allowances.
The Impact of Fiscal Drag
The UK government froze the personal allowance at £12,570 in April 2021 and plans to keep it unchanged until 2028. As a result, the freeze, combined with wage inflation, has driven “fiscal drag.” More people are now slipping into higher tax brackets, even though tax rates remain the same. In the 2023/24 tax year, the 60% tax rate affected around 634,000 taxpayers. That’s a 45% increase from 436,000 in 2021/22.
This highlights the growing importance of high earner tax planning to safeguard income and minimise exposure to stealth taxation.
(Source: Financial Times)
Three ways to manage the 100k Tax Trap
1. Strategic Pension Contributions
Making personal or employer pension contributions could reduce your adjusted net income, potentially reinstating some or all of your Personal Allowance. This has the dual benefit of tax efficiency and retirement funding.
Explore Bowmore’s tailored Retirement Planning services to learn more.
2. Salary Sacrifice
Arranging with your employer to exchange part of your salary for non-cash benefits could reduce taxable income. This may help you retain your personal allowance and increase benefits like pension contributions or childcare vouchers.
3. Timing of Income
Where appropriate, managing the timing of bonuses, dividends, or additional income streams could help high earners reduce exposure to the 60% marginal tax rate.
Deferring income may be effective, depending on your personal circumstances and tax rules.
However, personalised advice is essential to ensure any approach remains compliant with HMRC regulations and supports broader financial planning goals.
Plan ahead to Beat the 100k Tax Trap
If you’re approaching the £100,000 income threshold, proactive financial planning is essential. Strategies like these could help you manage your adjusted net income and avoid the 60% tax trap.
Managing exposure to the £100k tax trap is not about chasing tax breaks — it’s about structuring your finances to support the life you envision. For tailored advice, consider consulting with a financial planner who can help you navigate these complexities and optimise your financial position.
Bowmore’s integrated approach to financial planning and asset management ensures that your wealth strategy reflects your values, ambitions, and long-term security.
Explore our full Financial Planning services today.
Regulatory Information:
- The value of your investments can go down as well as up, so you could get back less than you invested.
- The tax treatment of certain products depends on the individual circumstances of each client and may be subject to change in future.
- Past performance is not a guide to future performance.
- Bowmore Asset Management Ltd is authorised and regulated by the Financial Conduct Authority.
- Bowmore Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.