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The Tapered Personal Allowance
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If you earn over £100,000 per year, you should be very careful about suffering from yet another “tax-trap”, known as “The Tapered Personal Allowance”.
For instance, on an income of between £100,000 and £125,140 you will actually the equivalent of a 60% tax rate! And here is us thinking work always pays!
How does it work?
If you are resident in the UK for income tax purposes, you will have an amount of money you can earn every year and not pay any tax on it.
For the 2026/27 tax year, the standard Personal Allowance remains £12,570. If your adjusted net income exceeds £100,000, your Personal Allowance is reduced by £1 for every £2 of income above this threshold. Once your adjusted net income reaches £125,140, your Personal Allowance is reduced to zero.
If you earn more than £100,000 in any given tax year (remember this is between 6th April to 5th April every year) then your personal allowance is “tapered” or reduced by £1 for every £2 you are over £100,000. This means that by the time your taxable income is £125,140 you have lost your personal allowance in full.
What income is used in the calculation?
This is based on your Adjusted Net Income (ANI). This includes most sources of taxable income, after taking account of certain allowable deductions. This includes income from employment, self-employment, pensions, rental income, savings and investments, after taking account of certain allowable deductions such as pension contributions and Gift Aid donations.
Adjusted Net Income may include:
- Salary, bonuses and taxable employment benefits (such as company cars or private medical insurance)
- Taxable profits from self-employment
- Savings interest
- Dividend income
- Rental income
- Pension income
- Certain trust income
- Some taxable state benefits
Your Adjusted Net Income may then be reduced by qualifying deductions, including:
- Gross personal pension contributions
- Certain trading losses
- Gift aid (gross value)
If your Adjusted Net Income is £100,000 or less, you keep your full Personal Allowance. Above £100,000, your Personal Allowance is reduced by £1 for every £2 of income until it is fully withdrawn once your Adjusted Net Income reaches £125,140. Depending on your circumstances, you may also need to complete a Self Assessment tax return.
Why is it called the £100k tax-trap?
As your Personal Allowance is withdrawn, each additional £1 of income is taxed more heavily than many people expect. This creates an effective 60% Income Tax rate for many taxpayers with Adjusted Net Income between £100,000 and £125,140.
Example
Sarah earns £110,000.
Her Personal Allowance is reduced by £5,000, meaning more of her income becomes taxable.
If Sarah makes a qualifying pension contribution that reduces her Adjusted Net Income below £100,000, she may restore some or all of her Personal Allowance, depending on her circumstances.
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How can you reduce the impact of the Tapered Personal Allowance?
Making additional pension contributions may reduce your Adjusted Net Income, which could help preserve some or all of your Personal Allowance. Likewise, qualifying Gift Aid donations can also reduce your Adjusted Net Income. If your employer offers salary sacrifice arrangements, these may also help improve tax efficiency in certain circumstances.
Depending on your circumstances, it may also be worth reviewing how investment income or rental income is held between spouses or civil partners, where this is appropriate and in line with tax legislation. Business owners may also wish to review how profits or dividend income are structured. Professional advice should always be sought before making changes.
Why is this often referred to as the “£100k Tax Trap”?
For many taxpayers, earning between £100,000 and £125,140 creates what is commonly referred to as an effective 60% Income Tax rate. This happens because, as your Personal Allowance is gradually withdrawn, more of your income becomes taxable. Although your headline Income Tax rate remains 40%, the loss of your tax-free allowance means the effective rate on this slice of income is significantly higher. National Insurance is charged separately and will depend on your individual circumstances.
Once your Adjusted Net Income exceeds £125,140, your Personal Allowance has been fully withdrawn. From this point onwards, you no longer lose additional Personal Allowance, so the effective 60% Income Tax rate no longer applies. If your income is above the additional rate threshold, you’ll pay Income Tax at the prevailing additional rate on that income.
As tax thresholds have remained frozen while earnings have increased, more people are finding themselves affected by the Personal Allowance taper each year. What was once considered a tax issue for only the very highest earners is now impacting a growing number of professionals and business owners.
Tax rules and allowances can change, and the benefits of any strategy will depend on your individual circumstances. Before making financial decisions, consider seeking personalised advice from a qualified financial adviser.
