The £100,000 Tax Trap - Are you in Danger?

What Is the “£100k Tax Trap”?

The “£100k Tax Trap” occurs when a UK earner’s adjusted net income - that’s total taxable income minus pension contributions and Gift Aid donations - exceeds £100,000. From that point, the £12,570 personal allowance is withdrawn at £1 for every £2 earned over the threshold, up to £125,140. This means income in that band faces an effective 60% marginal tax rate—40% tax plus a 20% allowance loss. In addition, you face losing your free childcare hours of one parent's income exceeds £100,000.

What Makes It So Troublesome?

1. A Staggering Drop in Take-Home Pay

Even a modest bonus or salary increase can leave clients in the trap earning much less than expected. The dual effect of higher tax and allowance tapering means only about 40p of every extra £1 lands in their pocket. With National Insurance and student loan repayments, the effective rate can climb towards 70%.

2. The Childcare “Cliff Edge”: Lose It All with a Pound

The most surprising - and painful - consequence: a total loss of free childcare hours and Tax-Free Childcare entitlement once one parent’s income exceeds £100,000. This loss is abrupt: even a £1 rise can strip away:

• 30 hours/week of free childcare for 3–4-year-olds (and the rising 30-hour offer for 9-month-olds from September 2025)

• Up to £2,000/year per child in Tax-Free Childcare support.

  
  

In practical terms, families can lose benefits worth thousands annually:

• A London parent with two under-3s may need to earn over £149,000 just to be no worse off than someone on £99,999

• In high-cost areas like inner London, families might lose £23,000+ in free hours, plus £2,000 in Tax-Free Childcare, for a combined impact of around £25,000.

  
  

3. The Emotional and Economic Toll on HENRYs

High Earners, Not Rich Yet (HENRYs) often feel penalized as their six-figure incomes bring financial strain, not freedom. Many sacrifice career progression or bonus income to remain below the threshold. One tech worker even turned down promotions or shifted to contracting just to preserve childcare benefits.

How Financial Planning can Help

A. Pension Contributions & Salary Sacrifice

Arguably the most powerful lever:

• By increasing pension contributions using relief-at-source or salary sacrifice, clients can reduce their adjusted net income, helping them stay below £100k. This protects their personal allowance and childcare benefits

• For my clients, who reside mostly in the Brookmans Park and Potters Bar areas of Hertfordshire, maintaining eligibility for childcare benefits via salary sacrifice may save tens of thousands compared to the alternative.

  
  

B. Charitable Giving (Gift Aid)

Gift Aid donations deduct the gross amount from income, similarly lowering adjusted net income and helping retain both tax allowance and childcare support.

C. Income Timing & Bonus Structuring

Delaying bonuses or staggering income across tax years can be helpful. For example, splitting large payments across financial years can keep adjusted income below the threshold.

D. Income Shifting Between Partners

Transferring income-generating assets or dividends to a lower-earning partner (<£100k) can preserve household eligibility for support.

E. Addressing Payroll Lags & HMRC Notices

When earnings jump mid-year, HMRC may not immediately adjust tax codes, leading to unexpected liabilities communicated via Self-Assessment in the following year. Clients should proactively communicate with HMRC to update tax codes and manage PAYE adjustments.

My Summary Checklist

Challenge	Strategy
60% marginal tax (income between £100k–£125k)	Increase pensions (especially via salary sacrifice)
Loss of personal allowance and childcare benefits	Use pensions, Gift Aid, or income timing to stay ≤ £100k
Abrupt loss of childcare support (“cliff edge”)	Detailed adjusted income forecasting and early intervention
Unexpected tax liabilities via PAYE lag	Communicate proactively with HMRC, update tax codes
High childcare costs in expensive areas like Potters Bar, St Albans,and Brookmans Park	Emphasise salary sacrifice and long-term planning

Even if you earn well over £100,000, there are opportunities for long term planning and optimisations that will help you navigate high tax rates and less state support. Drop me an email if you have any specific questions.

The Broader Policy Canvas and the Planner’s Role

The “£100k Tax Trap” reflects a broader conflict: fiscal drag - where frozen thresholds pull more earners into punitive tax zones over time - has turned significant earnings into real-income losses for many families.

As a financial planner, I not only navigate clients through these technical pitfalls - but also help you manage its psychological weight. Advising on strategy is only part of the role; offering reassurance, clarity, and advocacy is a also an important part of my service.

Closing Thoughts

Earning over £100,000 can paradoxically mean you take home less - and even lose valued benefits like childcare. But effective planning solutions do exist: pension contributions, Gift Aid, salary sacrifice, income timing, and partner income restructuring can help preserve not just tax allowances but vital support systems.

If you're looking for Independent Financial Advice, Pension Planning, Investment Advice, or anything else, drop me an emal at CB@DGSifa.com

If you're based in Brookmans Park, Potters Bar, St Albans, or Hertford - I am more than happy to have a face-to-face meeting to disucss how I can best serve you.