£100K Tax Trap Calculator

When you start earning between £100,000 and £125,140, you pay an effective tax rate of 60%, known as the ‘£100k tax trap’.

This is because when you reach this level of earnings, you start to lose your ‘personal allowance’, which is the amount you can earn before you pay any tax.

This can even be the case if you earn under £100k, but you get a bonus that takes you over the threshold.

For every £2 you earn over £100,000, you lose £1 of your personal allowance. By the time your earnings hit £125,140, you no longer have any personal allowance remaining. 

This basically happens because you pay 40% income tax on higher earnings which means you lose 40p in each £1 you earn.

For every £2 you earn over £100,000, your personal allowance is reduced by £1.

This means your extra £1 of income effectively costs you another 50p of your tax-free allowance. You are then taxed at 40% on that lost 50p of allowance, costing you an additional 20p tax.

Added together, that means you’re effectively paying 60p tax in the pound – or 60%.

It’s your adjusted net income, which is mostly gross income, minus some allowable deductions.

HMRC defines it as: Your total taxable income before personal allowances, minus things like:

• Pension contributions (if paid into a pension scheme that gets tax relief)
• Donations to charity through Gift Aid
• Trading losses
• Some other deductions (like grossed-up pension contributions if paid via salary sacrifice)

It’s not just tax that can slash your income once you hit £100,000.

A parent earning just over £100,000 in adjusted net income also loses all government-funded childcare support. If you’re in a couple, even if just one of you rises above the £100,000 threshold, you’ll still trigger that total loss of funded childcare.

This includes losing the eligibility to receive the tax-free childcare government top-up, which is worth up to £2,000 per child each year.

Your eligibility to claim 30 hours of free childcare for all children under 5 is also slashed to 15 hours, and you won’t be able to access the new working‑parents entitlement of 30 free hours per week for children from 9 months old under the new expanded scheme.

Together, these losses could cost you thousands of pounds in extra childcare expenses.

The most appealing and effective way to beat the tax trap is to reduce your adjusted net income without losing your extra earnings.

Your adjusted net income is your gross income minus your pension contributions, and any trading losses and Gift Aid donations you’ve made.

A popular solution is to redirect more earnings into a pension.

Say your usual salary is £99,000 and you receive a £15,000 bonus before the end of the tax year. By putting that straight into your pension, your adjusted income stays below £100,000.

This means your full personal allowance is then restored, your childcare allowances are unaltered, and you get 40% pension tax relief on your pension.

Be aware that the current standard annual allowance – the amount you can put into your pension each year – is £60,000, but it can be lower for high earners. 

However, you can ‘carry forward’ any unused allowance from the three previous tax years if you need to put a lot away in one year. 

You could also consider making charitable donations to bring your salary down.

Charitable donations through Gift Aid extend your basic rate tax band, reducing your higher-rate exposure. For example, a £1,000 donation could increase your basic rate band by £1,250.

Alternatively, if your employer allows you to give up part of your salary in return for benefits like bikes, gym
membership, private health cover, electric cars, laptops, phones, or childcare, (known as salary sacrifice schemes), this could help you keep your income out of that £100k danger zone.

And finally, if it’s a bonus or one-off payment that is pushing you over £100k, you could hold back on taking it all at one time, and ask if the payment can be split across multiple tax years.

Yes – remember that if you put money into your pension, you won’t be able to take it out again until you reach retirement age. This can differ depending on what pension you are in. But it means it isn’t available for your life expenses now.