How To Protect Your Personal Allowance If You Earn Over £100,000

Most people in the UK are entitled to a ‘Personal Allowance’.

This is the amount of income you can usually earn each tax year before you start paying Income Tax.

For most people, in the current tax year, the Personal Allowance is £12,570.

Although many people focus on their salary, HMRC looks at something called ‘adjusted net income’.

In simple terms, this is your total taxable income – including things like your salary, bonuses, and any rental income and dividends you receive – minus certain deductions, such as pension contributions, Gift Aid donations and some trading losses.

This is important because it’s your ‘adjusted net income’, not just your salary, that determines when your Personal Allowance starts to be withdrawn.

Once your adjusted net income goes above £100,000, you gradually begin to lose this allowance.

Losing your Personal Allowance means more of your income becomes taxable.

For every £2 your adjusted net income exceeds £100,000, you lose £1 of your Personal Allowance. So by the time your adjusted net income reaches £125,140, your Personal Allowance is gone completely.

You may have heard of the ‘60% tax trap’ (it’s also known as the £100,000 tax trap).

There is no official 60% Income Tax band. However, when two different tax rules overlap, it can result in an effective tax rate of 60% being applied on earnings between £100,000 and £125,140.

That’s because while you continue paying higher-rate Income Tax on this part of your income, you’re also losing part of your Personal Allowance at the same time, so the amount of tax you effectively pay on each additional £1 earned is much higher.

In some cases, yes.

The higher tax bill isn’t the only thing to think about.
Going above £100,000 can also affect other benefits and allowances, depending on your circumstances.

For example, some families may begin to lose entitlement to Tax-Free Childcare or the free childcare hours available in England once a parent’s adjusted net income exceeds £100,000.

If losing these benefits costs more than the extra take-home pay from a pay rise, you could end up financially worse off overall.

Exactly how much depends on your personal circumstances.

No, not usually. Earning more money is generally a good thing!
It’s just really important to understand how the tax system works at this level.

It’s also important to understand that it’s perfectly possible to reduce the impact of these rules by planning ahead.

For example, some people choose to:

• Make additional pension contributions
• Use salary sacrifice if their employer offers it
• Make Gift Aid donations to charity
• Time bonuses or other income differently so they are spread across multiple years

Taking these steps can reduce your adjusted net income and help preserve some or all of your Personal Allowance and let you keep hold of childcare allowances.

Personal Allowance: The amount of income you can usually earn each tax year before paying Income Tax.

Adjusted net income: Your total taxable income, minus certain deductions such as pension contributions and Gift Aid donations.

Higher-rate Income Tax: The rate of Income Tax paid on part of your income once it exceeds the basic-rate threshold.

Salary sacrifice: An arrangement where you agree to give up part of your salary in exchange for an employer-provided benefit, such as pension contributions.

Gift Aid: A scheme that allows charities to claim extra money on eligible donations and can also reduce your adjusted net income.