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.

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.

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)
• Use PayeTax's Optimizer: Automatically calculates your optimal strategy

---

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.

---

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

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

---

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.

---

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

---

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

Use PayeTax's optimizer to calculate your exact optimal amount.

---

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.

---

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

---

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.

---

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.

---

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?

---

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.co.uk 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: PayeTax.co.uk

---

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

Solution: Even more important to use pension contributions!

---

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.

---

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.

---

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

---

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

---

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.

---

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.

---

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.

---

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.

---

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

✓ Use PayeTax's free optimizer for personalized recommendations

Action Plan

Today:

1. ✅ Calculate your position with PayeTax's optimizer
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

---

Calculate Your Position Now (Free)

Use PayeTax's £100k Tax Trap Optimizer 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 Now 👈

---

Additional Resources

• Higher Rate Taxpayer Guide - Comprehensive guide for 40% taxpayers
• UK Tax Calculator Guide - How to use our calculator
• HMRC Official Guidance - Personal Allowance taper rules
• About PayeTax - Learn about our features and mission

---

Questions? Comments? Use PayeTax's calculator to explore your options: PayeTax.co.uk

Last updated: January 2025. Tax rules current for 2025-2026 tax year. Always consult a qualified tax advisor for personalized advice.