100k Tax Trap UK: Why More Income Can Cost More Tax

The 100k tax trap can affect UK taxpayers when their adjusted net income goes above £100,000. At that point, the tax-free Personal Allowance starts to fall. For every £2 of adjusted net income above £100,000, the Personal Allowance is reduced by £1. Once income reaches £125,140, the allowance is lost completely. This is why earning more can sometimes leave people with much less than they expected after tax, especially where bonuses, dividends, rental income, or benefits in kind are involved.

What is the 100k tax trap?

The 100k tax trap is not a separate tax. It is the effect of losing the Personal Allowance when adjusted net income goes above £100,000.

Most UK taxpayers receive a Personal Allowance. This is the amount of income they can earn before paying Income Tax. For the 2026/27 tax year, the standard Personal Allowance is £12,570. However, this allowance is reduced when adjusted net income goes above £100,000. Official HMRC guidance on GOV.UK confirms that the Personal Allowance is reduced by £1 for every £2 of adjusted net income above £100,000, until it is lost completely at £125,140.

This creates a problem for people earning between £100,000 and £125,140. They are not only paying tax on their extra income. They are also losing part of their tax-free allowance. That means more of their income becomes taxable.

In simple terms, the 100k tax trap makes this income band expensive from a tax point of view, so the real cost of extra income should be checked before decisions are made.

Why the 100k tax trap can make extra income costly

Many people assume that earning more always means taking home much more. In most cases, that is true. But the 100k tax trap changes the picture because the extra income can also reduce the Personal Allowance.

For example, a salary rise, bonus, dividend, or rental profit may push someone just over £100,000. On paper, that looks like good news. In practice, the extra income may also cause part of the tax-free allowance to disappear.

This is why some taxpayers are surprised when they see their final tax bill. The extra income has not only been taxed in the normal way. It has also caused more income to become taxable.

For many taxpayers outside Scotland, this is often described as an effective 60% marginal Income Tax rate on income between £100,000 and £125,140, before National Insurance or other factors are considered. This comes from the combined effect of 40% higher rate tax and the withdrawal of the Personal Allowance. The position may differ for Scottish taxpayers because Scottish Income Tax rates and bands apply to non-savings and non-dividend income.

Adjusted net income is the number to watch

A common mistake is to look only at salary. The 100k tax trap is based on adjusted net income, not just basic pay.

Adjusted net income starts with total taxable income. It can include salary, bonuses, dividends, rental profits, savings interest, benefits in kind, and other taxable income. Certain deductions and reliefs may then be taken into account, including some pension contributions and Gift Aid donations. HMRC provides guidance on adjusted net income, including how Gift Aid and certain pension contributions are treated in the calculation.

This means someone with a salary below £100,000 may still fall into the trap if they receive other income. For example, a person earning £92,000 could cross the threshold after receiving:

• A bonus
• Dividends from a company
• Rental profits
• Savings interest
• Taxable employment benefits

That is why tax planning should start with the full picture, not just the payslip.

Who can be affected by the 100k tax trap?

The 100k tax trap can affect many types of taxpayers. It is not limited to employees with a six-figure salary.

Company directors can be affected when they take salary and dividends. Senior employees can be affected by bonuses, commissions, or share awards. Landlords can be affected when rental profits increase. Consultants and self-employed professionals can be affected when business profits rise. Investors can be affected by dividends or interest.

The issue is often worse when income changes during the year. A person may not expect to go over £100,000 in April, but the position may look very different by March.

The wider tax environment also matters. Frozen thresholds, dividend tax, savings income, property income, and pension rules can all affect how much a higher earner keeps after tax. For a broader view of recent UK tax changes and how they may affect individuals and businesses, read our related article: UK Budget 2025: how will it affect individuals and businesses?

This is why the 100k tax trap should be reviewed before the end of the tax year. Once 5 April has passed, many planning options become harder or impossible.

Common triggers that push people over £100,000

The 100k tax trap often appears because of one extra payment or one overlooked source of income. These triggers can be easy to miss when income is reviewed too late.

Common triggers include:

• A year-end bonus
• A promotion or salary increase
• Extra dividends from a company
• Higher rental income
• Interest from savings
• A taxable company car or private medical benefit
• Self-employed profits that are higher than expected
• Investment income outside tax-free wrappers

Each item may seem small on its own. But when added together, they can push adjusted net income above £100,000.

The practical point is simple. Taxpayers should check total taxable income, review reliefs and deductions, and consider timing decisions before the tax return is prepared. By then, the income has already been received and the chance to plan may be limited.

How the Personal Allowance reduces

The table below shows how the Personal Allowance taper can work in practice. It is a simplified illustration and does not include National Insurance, Scottish Income Tax differences, dividend rates, or other personal circumstances.

Adjusted net income	Personal Allowance left	Planning point
£100,000	£12,570	The taper has not started
£110,000	£7,570	£5,000 of allowance has been lost
£120,000	£2,570	Most of the allowance has been lost
£125,140	£0	The allowance has been fully withdrawn

This is why the band between £100,000 and £125,140 needs careful attention. A taxpayer should understand the income level, the allowance lost, and the cash flow effect before making decisions around bonuses, dividends, pensions, or charitable donations.

How pension contributions may help

Pension contributions can sometimes help manage the 100k tax trap, because they may reduce adjusted net income. This can help preserve some or all of the Personal Allowance.

For example, if a taxpayer expects adjusted net income of £110,000, a suitable pension contribution may bring adjusted net income closer to £100,000. Depending on the facts, this could reduce the loss of the Personal Allowance and improve the overall tax position.

However, pensions should not be used without proper checks. The pension annual allowance, carry forward rules, employer contributions, and the tapered annual allowance may all be relevant. HMRC explains that higher earners may be affected by the tapered annual allowance rules where both threshold income and adjusted income exceed the relevant limits.

Pension planning should also fit the person’s cash flow and long-term plans. Saving tax is useful, but locking money into a pension may not suit everyone.

How Gift Aid can affect the calculation

Gift Aid donations can also be relevant to the 100k tax trap. When a qualifying Gift Aid donation is made, it can affect adjusted net income. This may help some taxpayers reduce or avoid the Personal Allowance taper.

This does not mean people should donate only for tax reasons. Charitable giving should still be a personal decision. But if donations have been made, they should be recorded properly and included in the tax review.

Good records matter. Taxpayers should keep the charity name, the amount donated, and the date of donation. Where donations are material, they should also check that the Gift Aid declaration was valid and that enough UK tax has been paid to cover the charity’s Gift Aid claim.

Planning for directors and business owners

The 100k tax trap is especially relevant for company directors and owner-managed businesses. Directors often have more control over how and when income is taken.

For example, a director may be able to review the mix of salary and dividends. They may also be able to consider whether a bonus should be paid in one tax year or another. In some cases, it may make sense to retain profits in the company rather than extract more income personally.

This does not mean income should always be reduced. Business needs come first. A director may need funds for personal costs, mortgage payments, school fees, or investment plans. The point is to understand the tax cost before taking the income.

WellTax supports UK taxpayers, company directors, and internationally active individuals with UK tax planning, accounting matters, and cross-border tax considerations where UK and UAE issues overlap. A short review before the year end can prevent an unexpected tax bill later.

Year-end checklist for the 100k tax trap

Anyone close to the 100k tax trap should review their position before 5 April. The earlier the review takes place, the more practical options may be available.

A practical checklist includes:

• Estimate total taxable income for the year
• Include salary, bonus, dividends, rental income, interest, and benefits
• Calculate adjusted net income
• Check whether income is above £100,000
• Review pension contribution options
• Check Gift Aid donations
• Review dividend or bonus timing
• Consider cash flow before making decisions
• Speak to a tax adviser before the tax year closes

This does not need to be complicated. The first step is simply knowing whether adjusted net income is likely to exceed £100,000. From there, the taxpayer can review income timing, available reliefs, and personal cash flow before making decisions.

Final thoughts on the 100k tax trap

The 100k tax trap is one of the most misunderstood parts of the UK tax system. It does not mean people should avoid earning more. It means they should understand the real tax effect of earning more once adjusted net income rises above £100,000.

The best approach is early planning. A taxpayer should check the numbers before the tax year ends, not after the tax return is prepared. Pension contributions, Gift Aid donations, dividend planning, and bonus timing may all help in the right circumstances.

For anyone close to the £100,000 mark, a short review can make a real difference. WellTax can assist with adjusted net income reviews, UK tax planning, and year-end tax checks where professional input is needed.

Written by Luca Marin, Partner & Chartered Accountant in UK, WellTax.