The £100,000 Trap: How a Pay Rise Can Cost You More Than You Earn…

Overview

Once your income crosses £100,000, the rules change. The personal allowance, the amount you can earn before paying income tax, starts to be withdrawn. For every £2 you earn above £100,000, you lose £1 of your allowance.

By the time your income reaches £125,140, your personal allowance is gone entirely.

The result is a hidden tax band where income is effectively taxed at 60%. Not because HMRC created a 60% rate, but because you’re paying 40% tax on the extra earnings, while simultaneously losing personal allowance that was sheltering other income from 20% tax. The combined effect on each pound earned in this band is 60%.

For many people, a bonus, a pay rise, or a strong year in business tips them into this zone without any warning.

 Meet Sophie

At 38, Sophie is a senior manager for a logistics company in Birmingham, earning £105,000. Her career has been shaped by consistent hard work and determination, so when a recent promotion came with a £10,000 pay rise, it felt like a well-earned reward she was genuinely pleased about.

What Sophie’s payslip didn’t show was that she had already fallen into a tax trap and her pay rise only deepened it.

Before the promotion, the portion of her income between £100,000 and £105,000 was already being taxed at an effective rate of 60%. The additional £10,000 pushed her further into this band, meaning she only kept around £4,000 of the increase, with the rest lost to tax.

She hadn’t done anything wrong, she simply didn’t know the rule existed.

The Problem in Numbers

·       Income Tax: up to £12,570 tax-free (personal allowance)

·       £12,571 – £50,270: 20% basic rate

·       £50,271 – £100,000: 40% higher rate

·       £100,001 – £125,140: 60% effective rate

·       Above £125,140: 45% additional rate

The Solution

Sophie’s financial adviser explains that pension contributions are one of the most effective tools available. Contributions reduce her adjusted net income, which is the figure HMRC uses when calculating the personal allowance withdrawal.

By making a gross pension contribution of £15,000, Sophie’s adjusted net income falls back below £100,000. This restores her full personal allowance of £12,570.

To achieve this, Sophie would pay £12,000 into her pension, with 20% basic rate tax relief automatically added. As a higher-rate taxpayer, she can then claim a further £3,000 of tax relief through her tax return, meaning the net cost to her is effectively £9,000.

The Effect

By contributing £9,000 of her own money into her pension, Sophie benefits from tax relief which increases this to £15,000 invested.

As a result, her income falls back below £100,000, restoring her full personal allowance and saving around £2,500 in tax.

She may also regain eligibility for Tax-Free Childcare, worth up to £2,000, which is lost once income exceeds £100,000.

In summary, Sophie turns £9,000 into £15,000 in her pension, while potentially gaining over £4,500 in additional tax savings and benefits.

A bigger pension, a lower tax bill, and a stronger financial future.

What Sophie does next

Once Sophie understood what was happening, the approach became simple. At the start of each tax year, she and her adviser review her salary and any expected bonus, using pension contributions and salary sacrifice to keep her income in the right range.

Before, she was unknowingly falling into the tax trap. Now, she’s actively managing her income to avoid it altogether. She hasn’t taken a pay cut. She’s just stopped giving away more in tax than she needs to.

The Broader Point

The £100,000 tax trap often catches people doing well in their careers, yet it’s rarely flagged by employers and HMRC doesn’t send a warning. As a result, many spend years overpaying tax or missing out on valuable reliefs without realising.

A straightforward conversation with a financial adviser can make all the difference.