The £100,000 tax trap and how are some getting around it

1st November 2025

The £100,000 tax trap refers to a steep effective income tax rate up to 60% that hits UK earners between £100,000 and £125,140 due to the gradual loss of the personal allowance. Many mitigate this by using pension contributions, charitable donations, and salary sacrifice schemes.

A breakdown of how it works and how people are legally avoiding it

What Is the £100,000 Tax Trap?
Personal Allowance Withdrawal: In the UK, everyone gets a tax-free personal allowance (£12,570 in 2025). But once your income exceeds £100,000, this allowance is reduced by £1 for every £2 earned over the threshold.

Complete Loss at £125,140: By the time you earn £125,140, your entire personal allowance is gone. This creates a marginal tax rate of 60% on income between £100,000 and £125,140.

Real-World Impact: A £1,000 pay rise above £100,000 could leave you just £400 better off after tax, or even less if you lose access to Child Benefit or other allowances.

How People Are Legally Avoiding It

Pension Contributions
Contributing to a pension reduces your taxable income.

For example, earning £110,000 and contributing £10,000 to a pension brings your adjusted income back to £100,000—restoring your full personal allowance.

Gift Aid Donations
Charitable donations under Gift Aid can also reduce your adjusted net income.

This not only supports good causes but can help reclaim your personal allowance.

Salary Sacrifice Schemes
You can exchange part of your salary for non-cash benefits like extra pension contributions, childcare vouchers, or a company car.

This lowers your taxable income and can keep you below the £100k threshold.

Timing Bonuses or Income
If possible, defer bonuses or dividends to a future tax year to avoid breaching the threshold in a single year.

Spreading Income
Business owners or those with flexible income streams may spread earnings across tax years or shift income to a spouse in a lower tax band.

Why It Matters More in 2025
With tax thresholds frozen until 2028, more people are being pulled into this trap due to wage inflation.

Experts warn that without proactive planning, many professionals will face unexpected tax bills.