The £100,000 Tax Trap: What High Earners Need to Know
The income band between £100,000 and £125,140 has become one of the least efficient areas of the UK personal tax system. The interaction between the higher-rate threshold and the withdrawal of the personal allowance results in a marginal tax rate that is significantly higher than the headline rates suggest.
For senior professionals, entrepreneurs and high-net-worth individuals, this band is becoming increasingly relevant as frozen thresholds and pay inflation draw more people into higher rates of tax. Understanding how this works, and where there may be planning opportunities, is now an important part of personal financial strategy.
How the £100,000 Tax Trap Works
For the 2025/26 tax year, most individuals are entitled to a personal allowance of £12,570, which is the amount that can be earned free of income tax. Once adjusted net income exceeds £100,000, this allowance is reduced by £1 for every £2 of income. The allowance is fully withdrawn when income reaches £125,140.
This tapering effect creates a steep marginal tax rate in the £100,000 to £125,140 band. In practice:
- Income in this range is subject to the 40% higher rate.
- At the same time, the gradual loss of the personal allowance has the effect of adding a further 20% income tax on that slice of income.
- When employee National Insurance contributions are included, the combined marginal rate for some individuals can be around 62%.
The result is that an additional pound earned in this band may be taxed more heavily than income above £125,140, where the personal allowance has already been fully withdrawn and the marginal income tax rate falls back to 45% plus National Insurance.
Fiscal drag and why more people are affected
The personal allowance and key income tax thresholds have been frozen in cash terms at their current levels since 2021 and are expected to remain so until April 2028.
Over time, this freeze, combined with wage and bonus inflation, has led to:
- More individuals entering the higher and additional-rate bands.
- A marked increase in the number of people affected by the 60% marginal rate linked to the £100,000 threshold.
This process is often referred to as “fiscal drag”. For high earners, it means that income which might once have been taxed at 40% is now exposed to a significantly higher effective rate within this narrow band.
Why this is important for high-net-worth individuals
High-net-worth individuals and senior executives often have more flexibility in how and when income is taken. At the same time, they may be more exposed to the £100,000 band through:
- Variable remuneration such as bonuses or profit shares.
- Income from multiple sources, including employment, business interests and investments.
- Cross-border arrangements, where UK tax interacts with other regimes.
The £100,000 tax trap can influence:
- The net benefit of taking additional salary or bonus.
- The optimal timing of variable income.
- How pension contributions and other allowances are best used.
Recognising where the steepest marginal rates fall allows clients and advisers to consider whether income can be managed more efficiently within the rules.
Planning Considerations
The right course of action is highly specific to each individual’s circumstances, objectives and jurisdictional position. However, for those affected by the £100,000 band, common areas of planning discussion include:
- Pension contributions that reduce adjusted net income and may, in some cases, help restore part or all of the personal allowance.
- Salary sacrifice arrangements, for example for pension funding or other agreed benefits, where appropriate and available.
- Timing of bonuses or variable income, where genuine flexibility exists over when amounts become taxable.
- Use of allowances across spouses or civil partners, particularly where one partner has significant unused basic-rate capacity.
- Structured charitable giving, which may provide income tax relief and help manage exposure to the taper.
These are established tools within the UK system, but their suitability will depend on wider issues such as cash-flow needs, long-term investment strategy, retirement planning and, for internationally mobile individuals, residence and domicile.
Looking Ahead
Whatever the outcome of the forthcoming Budget, it is likely that the £100,000 tax trap will remain a prominent feature of the UK tax landscape for the remainder of the current threshold freeze. For many high earners, the steep marginal rate between £100,000 and £125,140 is now one of the most important points to understand in their personal tax position.
For clients with significant or complex income, this environment reinforces the value of forward-looking planning. Ensuring that remuneration, savings and investments are aligned with both current rules and potential future changes is an important part of protecting long-term after-tax wealth.
Speak with us to explore your options
As the Budget draws closer, now is the time to explore your options.
If you are thinking about your business exit or re-locating from the UK, contact us today or email us at [email protected] to schedule an initial consultation.
Mark Routen
Chartered Tax Advisor
As Forth Capital's Head of Tax, I offer tailored tax planning advice to high net worth international private clients. I help them understand their options, optimise their cross-border arrangements, and create a robust plan for their future.
Frequently Asked Questions
The “£100,000 tax trap” describes the effect of the personal allowance taper. Once an individual’s adjusted net income exceeds £100,000, the personal allowance (£12,570) is reduced by £1 for every £2 of income above that level. The allowance is fully removed when adjusted net income reaches £125,140. That loss of allowance creates an unusually high effective marginal tax rate in that income band.
Between £100,000 and £125,140, the individual is subject to the standard 40 % higher-rate income tax. At the same time, the reduction in the personal allowance means that part of the allowance which would have been tax-free becomes taxable at 40 %. The combination gives a marginal rate of about 60 % in income tax only. When employee National Insurance contributions are added, the combined marginal rate can approach 62 %.
The personal allowance is £12,570 (for most individuals) for the tax year. Once adjusted net income exceeds £100,000, the allowance is reduced by £1 for every £2 of income above that threshold. At income of £125,140 the allowance is fully withdrawn, and the individual receives no personal allowance for that year.
Yes. Pension contributions (or salary sacrifice into a pension) reduce adjusted net income. For someone whose ANI is above £100,000, a pension contribution that brings ANI below £100,000 may restore full personal allowance and reduce the effective marginal rate. The suitability of this approach depends on personal circumstances, contribution limits and broader objectives.
Yes, potentially. The personal allowance taper rule applies to UK residents whose adjusted net income is assessed under UK tax rules. For internationally mobile clients, residence, domicile, foreign income, tax treaties and resident-non-resident rules may affect how the allowance and ANI are calculated. Individual review is usually required.
Important: Please Read
- This article is for general information only and does not constitute personal tax, financial or legal advice.
- The tax rules described apply to the UK tax year 2025/26 and are based on current legislation and HMRC practice, both of which may change in the future.
- Tax treatment depends on individual circumstances, including residence, domicile and the nature of your income. The planning considerations outlined—such as pension contributions, salary sacrifice, timing of bonuses and charitable giving—may not be suitable for every individual and should not be acted upon without a full assessment of your personal situation.
- Nothing in this article should be taken as:
- Advice on how to structure remuneration or income
- A recommendation to undertake any specific planning
- A guarantee of tax outcomes
- A substitute for professional advice
- If you are a high earner, internationally mobile individual, or have multiple income sources, personalised advice is essential, as UK tax rules can interact with foreign tax regimes, double tax agreements, and local reporting requirements.
This article has been produced and published on behalf of Forth Capital Advisers Limited, Forth Capital Geneve Sarl, Forth Capital (Hong Kong) Limited, Forth Capital (USA) LLC, Forth Capital (Australia) Pty Ltd, Forth Capital (Europe) Limited.
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