The £100k Tax Trap: How to Avoid Paying 60% Tax in 2025

Last Updated: January 2025 | Tax Year: 2025-2026

Earning over £100,000 should feel like a career milestone. Instead, it triggers Britain's most brutal tax trap: a hidden 60% marginal rate that can cost you thousands.

Here's the shocking truth: on income between £100,000 and £125,140, you effectively pay MORE tax than someone earning £200,000. Which means a £5,000 raise could leave you with just £2,000 in your pocket—less than half.

In this guide, we'll explain exactly how this trap works, how much it costs you, and most importantly—how to avoid it legally and intelligently.

Check if you're in the tax trap now

Quick Summary (TL;DR)

• The Trap: Earn £100k-£125k = 60% effective tax rate (plus 2% NI = 62% total)
• The Cause: HMRC reduces your Personal Allowance by £1 for every £2 over £100k
• The Cost: Up to £5,028 extra tax (vs. someone earning £99,999)
• The Fix: Pension contributions to drop below £100k threshold
• ROI: £1 pension contribution costs only 60p (40p tax relief)

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What is the £100k Tax Trap?

The Normal Tax System (Simplified)

In the UK, you normally pay tax like this:

Seems straightforward, right? Wrong.

The Twist: Personal Allowance Taper

Here's what HMRC doesn't shout about: once you earn over £100,000, they start taking away your tax-free Personal Allowance.

The rule (from official HMRC guidance):

Your Personal Allowance reduces by £1 for every £2 you earn over £100,000.

This creates a brutal effective tax rate:

• You pay 40% tax on income over £100k (normal higher rate)
• PLUS you lose 40% tax on the Personal Allowance you're losing
• Total effective rate: 60%

At £125,140, your Personal Allowance disappears completely. Which means someone earning £125,140 has zero tax-free income—they pay tax on every single pound.

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How Does It Work? (With Real Numbers)

Example: £110,000 Salary

Normal calculation (what you might expect):

• Income over £100k: £10,000
• Tax at 40%: £4,000

Actual calculation (with taper):

• Income over £100k: £10,000
• Lost Personal Allowance: £10,000 ÷ 2 = £5,000
• Tax on income: £10,000 × 40% = £4,000
• Tax on lost allowance: £5,000 × 40% = £2,000
• Total tax on £10k income: £6,000 = 60% rate

See the full £110k breakdown

The Math Breakdown

For every £2 you earn over £100k:

1. You lose £1 of Personal Allowance
2. That £1 gets taxed at 40%
3. Plus you pay 40% on the £2 you earned
4. Total: £0.80 tax on £2.00 income = 40% effective rate

Wait, that's only 40%? Here's the trick:

For every £1 of income over £100k:

• Direct tax: £0.40 (40% rate)
• Lost allowance: £0.50 worth (gets taxed at 40% = £0.20)
• Total: £0.60 tax = 60% effective rate

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How Much Does It Cost You?

Here's exactly what you lose at different salaries:

Real Impact

Scenario: You earn £115,000

• Lost Personal Allowance: £7,500
• Extra tax: £3,000 per year
• Over 5 years: £15,000 lost to the trap
• Over 10 years: £30,000 lost to the trap

That's a deposit on a house. A new car. A year of private school fees. Gone.

Calculate your exact position at £115k

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Why Does This Exist?

Brief History

The Personal Allowance taper was introduced in 2010 by Chancellor Alistair Darling as a "temporary" measure to target high earners without raising the headline 45% rate.

15 years later, it's still here.

HMRC's Logic

• Target high earners without changing visible tax rates
• "Stealth tax" - less politically controversial
• Easier to sell than "we're raising income tax to 60%"

The Reality

• Penalizes middle-class professionals, not ultra-wealthy
• Creates bizarre incentive to earn less or defer income
• A £1 raise can cost you £0.60 (plus 2% NI = 62p total!)
• Affects ~400,000 people annually

Which means the system punishes career progression at exactly the point where professionals often have families, mortgages, and the highest financial pressures.

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5 Legal Ways to Avoid the Trap

Strategy 1: Maximize Pension Contributions (BEST)

This is the most powerful strategy. Here's why:

Example: £115,000 salary

Current position:

• Salary: £115,000
• Taxable income: £115,000
• Personal Allowance: £7,570 (reduced)
• In 60% trap on £15,000

Optimized position:

• Salary: £115,000
• Pension contribution: £15,000
• New adjusted income: £100,000
• Personal Allowance: £12,570 (FULL)
• Take-home: Same or better!

The Math:

• Pension deposit: £15,000
• Tax saved: £15,000 × 60% = £9,000
• Net cost to you: £15,000 - £9,000 = £6,000
• Retirement pot gain: £15,000
• Instant ROI: 150% (£9,000 saving on £6,000 cost)

How it works:

1. Pension contributions reduce your "adjusted net income"
2. Lower adjusted income = higher Personal Allowance
3. Higher Personal Allowance = less tax
4. Plus you get pension tax relief
5. Plus employer matched contributions (if available)
6. Plus 25% tax-free lump sum at retirement

Which means every pound you put into your pension costs you just 40p after tax relief. That's the best investment return you'll find anywhere.

Calculate your optimal pension contribution

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Strategy 2: Salary Sacrifice

Exchange salary for non-cash benefits that don't count as income:

Popular schemes:

• Electric car leasing (£5k-£15k saving potential)
• Cycle to work (up to £1,000)
• Childcare vouchers (up to £2,549/year for existing schemes)
• Additional pensions (unlimited)
• Technology schemes (laptops, phones)

Example: £5,000 electric car salary sacrifice

• Reduces taxable income to £110,000
• Tax saved: £5,000 × 60% = £3,000
• Plus: Get a car worth £5,000
• Net cost: Only £2,000 for a £5,000 car

Check with your employer - not all offer these schemes.

Read our full salary sacrifice guide

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Strategy 3: Employer Pension Contributions

Ask your employer to increase their pension contribution instead of giving you a salary raise.

Example:

• Raise offered: £5,000
• Alternative: £0 raise + £5,000 employer pension
• Your taxable income: Unchanged (stays £100k)
• Your pension pot: +£5,000
• Tax saved: £5,000 × 60% = £3,000

Why it works:

• Employer contributions don't count as your income
• They go straight to pension
• You avoid the 60% trap
• Still grows your retirement pot

Best for: Salary negotiations, annual reviews, bonuses

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Strategy 4: Time Your Income

If you have control over when you receive income:

Strategies:

• Defer bonuses to next tax year
• Spread income across tax years
• Freelancers/contractors: Invoice strategically
• Investment income: Tax-deferred accounts (ISAs, SIPPs)

Example: £10,000 bonus

Instead of taking £10,000 in one year:

• Year 1: £5,000 (keeps you below £100k)
• Year 2: £5,000 (keeps you below £100k)
• Tax saved: ~£6,000 vs taking it all at once

Important: Only works if you can control timing legally.

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Strategy 5: Charitable Donations (Gift Aid)

Donations to registered charities reduce your adjusted income.

Example: £5,000 donation

• Your cost: £4,000 (after 20% Gift Aid)
• Charity receives: £5,000
• Your adjusted income: Reduced by £5,000
• Tax saved: £5,000 × 60% = £3,000
• Net cost to you: £1,000 (£4,000 - £3,000)

How it works:

• You claim higher-rate relief through Self Assessment
• Reduces adjusted income below £100k threshold
• Charity gets 25% more (Gift Aid)

Best for: Those who donate anyway, or want to support causes while tax planning.

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What NOT to Do

Common Mistakes

Turning down raises - Bad math! Even at 60%, you keep 40p of every £1. That's better than 0p.

Ignoring it completely - £3k-£7k per year is real money

Tax avoidance schemes - Illegal, risky, and HMRC is cracking down

Not planning ahead - Last-minute contributions may not work

Forgetting student loans - Plan 1/2 adds 9% more! (69% total marginal rate!)

Reality Check

Should you turn down a raise to avoid the trap?

NO! Here's why:

• At 60%, you keep 40p of every £1
• That's still better than earning nothing
• Plus pension contributions can offset it
• Your lifetime earnings matter more than one year's tax

Better question: How can I optimize what I do earn?

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Using PayeTax's £100k Tax Trap Optimizer

We built a free tool to make this simple. Here's how it works:

Step 1: Enter Your Salary

Go to PayeTax Calculator and enter your salary (e.g., £115,000).

Step 2: See the Warning

If you're in the trap zone (£100k-£125k), you'll see:

Tax Trap Detected
You're in the £100k-£125k zone where you lose Personal
Allowance at an effective 60% rate.

Step 3: View Optimizer Recommendation

Click "View Optimizer" to see:

Current Position:

• Salary: £115,000
• Personal Allowance: £7,570 (reduced)
• Effective rate: 60% on £15,000
• Take-home: £72,480

Optimized Position:

• Salary: £115,000
• Pension contribution: £15,000
• New adjusted income: £100,000
• Personal Allowance: £12,570 (FULL)
• Take-home: £70,480
• Retirement pot: +£15,000

Tax Saved: £9,000 Net Cost: £6,000 Total Benefit: £18,000 (£9,000 now + £15,000 future)

Step 4: Apply Suggestion

One-click updates the calculator with the recommended pension amount to see the full impact.

Try it now: Calculate at £115k | Calculate at £110k | Calculate at £120k

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Advanced Scenarios

Scenario A: Student Loans

Plan 1 or 2 adds 9% repayment rate:

• Base trap rate: 60%
• Student loan: +9%
• Total marginal rate: 69%!

Postgraduate loan adds 6%:

• Base trap rate: 60%
• Postgraduate loan: +6%
• Total marginal rate: 66%

Combined (both loans):

• Total marginal rate: 71%
• You keep only 29p of every £1 earned

Which means if you have student loans and earn £100k-£125k, pension contributions are even more critical. You're recovering 71p on every pound you contribute.

Solution: Even more important to use pension contributions!

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Scenario B: Scottish Taxpayers

Scottish taxpayers:

• Still get Personal Allowance taper (reserved UK matter)
• But Scottish tax bands apply to remaining income
• Can be even more complex with Scottish starter/basic/intermediate rates

Recommendation: Use PayeTax's Scottish tax calculator to see your exact position.

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Scenario C: Multiple Income Sources

All income counts towards the £100k threshold:

• Employment income
• Self-employment profits
• Rental income
• Dividends
• Bank interest
• Capital gains (separate system)

Plan holistically - pension contributions can reduce total adjusted income from all sources.

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Frequently Asked Questions

Does everyone earning £100k pay 60%?

No. You only pay 60% on income between £100k and £125,140.

• Below £100k = 40% rate
• £100k-£125k = 60% rate
• Above £125,140 = 45% rate

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Can I claim back overpaid tax?

Yes, if your employer didn't adjust your tax code correctly.

How:

1. Wait for P800 form from HMRC (automatic)
2. Or file Self Assessment and claim relief
3. Or claim through HMRC online services

Deadline: 4 years from end of tax year

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Do bonuses count towards the £100k threshold?

Yes! All employment income counts:

• Salary
• Bonuses
• Commission
• Benefits in kind (most)
• Overtime

This is your "adjusted net income" for HMRC purposes.

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What about dividends and rental income?

Yes, they count too.

Your "adjusted net income" includes:

• All employment income
• Self-employment profits
• Property rental income
• Dividend income
• Savings interest
• Pensions received

But: You can reduce it with pension contributions.

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Can I split income with my spouse?

Limited options:

Marriage Allowance doesn't help here (only for basic rate taxpayers)

You can:

• Transfer assets to spouse (rental property, investments)
• Use spouse's ISA allowance
• Consider pension sharing
• Joint ownership structures

Consult a tax advisor for complex situations.

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Is it legal to use pensions to avoid this?

100% legal! This is exactly what HMRC expects and encourages.

Pension tax relief is:

• Written into law
• Designed to encourage saving
• Used by millions of people
• Recommended by financial advisors

This is tax planning, not tax avoidance.

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Summary & Next Steps

Key Takeaways

• £100k-£125k trap is real and costs £1,500-£7,500 per year
• 60% effective rate due to Personal Allowance taper
• Pension contributions are the best legal solution
• ROI: 150%+ - £1 contribution costs only 60p

Action Plan

Today:

1. Calculate your position
2. Review your pension contribution options
3. Check employer's salary sacrifice schemes

This month:

1. Speak to your employer about pension contributions
2. Update your payroll if needed
3. Register for Self Assessment (if not already)

Before April 6th (tax year end):

1. Make any one-off pension contributions
2. Review next year's salary structure
3. Plan for bonuses/raises

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Calculate Your Position Now (Free)

Use PayeTax's £100k Tax Trap Calculator to:

• See if you're affected
• Calculate exact cost
• Get personalized pension recommendations
• Compare before/after scenarios

No sign-up. No email. Completely private.

Calculate £105k salary | Calculate £110k salary | Calculate £115k salary | Calculate £120k salary

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Additional Resources

• Salary Sacrifice Guide - Save even more with employer schemes
• Scottish Tax Calculator - Scottish taxpayers in the trap
• HMRC Official Guidance - Personal Allowance taper rules
• About PayeTax - Learn about our features and mission

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Questions? Comments? Use PayeTax's calculator to explore your options at your exact salary level.

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Disclaimer: This article provides general guidance on UK tax for informational purposes only. Tax rules change frequently and individual circumstances vary. For official tax calculations or advice on your specific situation, consult HMRC or a qualified tax advisor.

Last updated: January 2025. Tax rules current for 2025-2026 tax year.