The £100,000 tax trap

What happens at £100,000

Everyone starts with a tax-free Personal Allowance, currently £12,570. Once your income passes £100,000, that allowance is taken away at the rate of £1 for every £2 you earn above it, and by £125,140 it has gone entirely.

Losing the allowance is a second tax stacked on the tax you already pay. On each extra £1 you earn in this band you pay 40% Income Tax, and you also lose 50p of allowance, which is itself then taxed at 40%. Add National Insurance and the tax on your next £1 reaches about 62%. That is your marginal rate, and it is higher here than anywhere else a salaried employee goes, higher even than the additional rate above £125,140.

For parents, the childcare cliff makes it worse

The trap has a second edge for parents. The funded childcare hours and Tax-Free Childcare the government provides are withdrawn the moment your adjusted income passes £100,000, and unlike the allowance they do not taper. They disappear at a single pound over the line.

A working parent of young children can lose thousands of pounds of support for earning £1 too much, which can leave you worse off after a pay rise than before it. The calculator shows the size of the cliff for your own number of children.

How to climb out of the trap

The way out is to bring the income that counts back under £100,000. A pension contribution does it, as the worked example above shows. A Gift Aid donation does the same, because both reduce the income the allowance taper is measured against.

You do not have to reach £100,000 exactly to gain. Every pound you move out of the band is relieved at that 60%-odd rate until you clear it, so even a partial contribution is worth far more here than at any other income.

See where you stand

The calculator plots exactly where you sit against the trap, your effective and marginal rate, and what a pension contribution would do to both. Put your own salary in and see.