Most people assume a pay rise makes them better off. Usually that is true. But for anyone whose income crosses £100,000, the picture becomes more complicated than it first appears.

There is a band of the UK tax system between £100,000 and £125,140 where the effective tax rate on additional earnings is 60%. Not 40%. Not 45%. Sixty percent. And for parents with young children, the combined effect of tax and lost entitlements can push the real cost considerably higher than that.

This is not a loophole or an anomaly. It is a deliberate feature of the current system and it has been in place for years. What has changed is that more people are being caught by it. Income tax thresholds have been frozen since 2021 and are confirmed frozen until at least 2031. As wages have risen, hundreds of thousands of people have crossed the £100,000 line for the first time without any sense that they were entering unusual territory.

If your income is anywhere near £100,000, or you have received a bonus, promotion or dividend that has pushed you over it, this is worth understanding properly.

Why does this happen?

Everyone in the UK receives a personal allowance: the amount of income you can earn before paying any income tax. For the 2026/27 tax year it stands at £12,570.

Once your adjusted net income exceeds £100,000, that allowance starts to disappear. For every £2 you earn above £100,000, you lose £1 of your personal allowance. By the time your income reaches £125,140, the allowance is gone entirely.

The result is that income between £100,000 and £125,140 is effectively taxed twice: once at the standard higher rate of 40%, and again because losing the personal allowance exposes previously tax-free income to that same 40% charge. The combined effect creates an effective marginal rate of 60% on every pound earned within that band. Add National Insurance and the number rises to around 62%.

To put it plainly: if you earn £110,000 and receive a £10,000 pay rise, roughly £6,000 of it will go to HMRC.

What the numbers look like in practice

Take a simple example.

Your income is £105,000. You are £5,000 above the threshold. Under the taper rules, you lose £2,500 of your personal allowance, which exposes that £2,500 to 40% tax. That is an extra £1,000 in tax on top of the 40% you already owe on the £5,000 itself. The effective rate on that £5,000 is 60%.

Now consider a bonus. Your base salary is £95,000. Your employer pays a £15,000 bonus, taking your total income to £110,000. The first £5,000 of that bonus is taxed normally. The remaining £10,000 falls entirely within the taper zone. At 60%, you keep £4,000 of it.

You receive a £15,000 bonus. After tax, you take home around £7,500.

"The surprise is never that the rate is high. It is that most people do not know about it until after it has happened." — David Rogers, Bernard Rogers and Co

Parents face a separate problem

The personal allowance taper is significant on its own. For parents with young children, there is a second issue sitting directly on top of it.

Eligibility for tax-free childcare and the 30 hours of free childcare per week is assessed against adjusted net income. The threshold is £100,000. The cut-off is a cliff edge, not a taper.

Earning £99,999 gives you full eligibility. Earning £100,001 removes it entirely.

Tax-free childcare allows parents to receive up to £2,000 per year per child towards nursery, childminder and after-school club costs. The 30 hours entitlement covers children from nine months to four years old. Losing the 30 hours can cost parents up to £9,600 per child per year. For a family with two young children under five, the combined loss of both entitlements can be close to £20,000 a year.

The position many clients find themselves in is one where earning slightly above £100,000 leaves them meaningfully worse off than they would be just below it. Once the numbers are on paper, the response is usually the same: nobody told me this was how it worked.

What adjusted net income actually means

The threshold that triggers all of this is not your gross salary. It is your adjusted net income.

Adjusted net income is your total taxable income from all sources, including salary, dividends, rental income and savings interest, minus specific reliefs. The reliefs that reduce it include pension contributions, Gift Aid donations and certain trading losses.

This distinction matters because it means the threshold is not fixed to your payslip. A director on a salary and dividend combination who appears to earn more than £100,000 may have an adjusted net income below the threshold after pension contributions are taken into account. The same applies to an employed professional who also receives rental income.

The starting point for any conversation about the £100,000 trap is understanding exactly what your adjusted net income is across all sources, not just the employment income on your P60.

What can actually be done about it

The good news is that this is one of the more straightforwardly manageable areas of UK tax. The tools available are not complex. What matters is using them deliberately and early enough in the tax year to make a difference.

Pension contributions

The most commonly used and often most effective option. Personal pension contributions reduce your adjusted net income pound for pound. A contribution that brings your adjusted net income from £105,000 to £100,000 restores your full personal allowance and, for parents, reinstates childcare eligibility. The tax relief means the actual cost of that contribution is significantly less than the face value.

For company directors, employer pension contributions paid directly by the company are also deductible from the company's taxable profits. This creates a position where the company pays less corporation tax and the director avoids the personal allowance taper at the same time.

Salary sacrifice

For employees, agreeing to sacrifice salary in exchange for employer pension contributions removes that income from adjusted net income entirely, because it never appears as gross taxable pay in the first place. This is often the cleanest route for employees whose employers support it, and it also saves National Insurance on the sacrificed amount.

Gift Aid

Qualifying charitable donations made through Gift Aid also reduce adjusted net income. For someone sitting at £103,000 who makes regular charitable gifts, this is worth reviewing each year.

Reviewing the mix of income

For company directors and owner-managers, the split between salary and dividends affects adjusted net income. This is part of a broader conversation about structuring income efficiently, which our tax planning and advice service covers in detail.

None of these is a universal recommendation. The right approach depends on your income level, your employment status, whether you have children, your pension position and a range of other factors. What they have in common is that they all work better with planning earlier in the tax year, not as a last-minute scramble after it closes.

The timing problem

A question we hear regularly: can I just make a pension contribution in January before the self assessment deadline and sort it out then?

Sometimes, yes. But it is not always that simple.

For employees using salary sacrifice, contributions generally need to be agreed with the employer in advance. Many employers only allow changes at set points in the year. If a bonus pushes you over the threshold in November and your next salary sacrifice review window is in April, your options are already limited.

For directors contributing personally to a pension there is more flexibility. But the annual allowance, currently £60,000, caps total pension contributions across any one tax year. If you have previously drawn more than £10,000 in pension income, the money purchase annual allowance of £10,000 may apply instead.

A client who flags in April that their income is likely to be around £100,000 this year has options. One who mentions it in February, when the year has already closed, has significantly fewer.

Self assessment and the £100k threshold

Many people with income above £100,000 will need to complete a Self Assessment tax return, particularly where they receive dividends, rental income or other untaxed income. However, high income alone does not automatically mean a return is required, so it is worth checking your position with HMRC or your accountant.

Our personal tax service covers self assessment for directors, high earners and those with multiple income sources, alongside the kind of annual planning conversations that prevent unnecessary tax being paid year after year.

Is this affecting more people?

Yes, significantly. HMRC estimates that close to two million taxpayers had income above £100,000 in 2025/26. That number is expected to rise above two million in 2026/27 and approach 2.3 million by 2028/29. The thresholds are frozen until at least 2031.

This is not a tax primarily on the very wealthy. It is increasingly a tax on senior professionals, experienced owner-managers and anyone who has progressed steadily in their career over the last decade and now finds themselves on the wrong side of a threshold that has not moved while their earnings have.

"Originally designed to target the highest earners, the trap now catches people who were never intended to be in it. The system has not changed. The people it catches have." — David Rogers, Bernard Rogers and Co

Talk to David

If your income is close to £100,000, or you have had a year where a bonus or dividend has taken you over it, a conversation is worth having before the tax year ends rather than after.

The position is almost always more manageable than it first appears. What it requires is someone who knows the full picture and can work through the options with you honestly.

Call 01926 851516 or email davidrogers@bernard-rogers.co.uk.

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