The £100,000 trap, explained without the jargon

There's a stretch of the income tax system where earning more money makes you worse off per pound than a millionaire. It starts at £100,000 and it catches people out every single year, usually the year they finally get the promotion they'd been chasing.

It isn't a conspiracy and it isn't a mistake. It's the interaction of two perfectly ordinary rules that were never really designed to be read together.

The rule nobody mentions

Everyone gets a Personal Allowance — a slice of income you pay no tax on at all. For most people that's £12,570.

But once your income goes above £100,000, the allowance starts to disappear. For every £2 you earn above £100,000, you lose £1 of Personal Allowance. By the time you reach £125,140, it has gone entirely.

Losing allowance means income that used to be tax-free is now taxed at 40%. So on that band of earnings you're paying:

• 40% on the new money itself, plus
• 40% on the £1 of allowance you just lost for every £2 you earned

Which works out at an effective 60% marginal rate on everything between £100,000 and £125,140. Add employee National Insurance and the true figure is a shade higher still.

Above £125,140 the allowance has gone, there's nothing left to lose, and the rate settles back down to 45%. Hence the odd result: earning £110,000 means facing a higher marginal rate than earning £300,000.

What it actually costs

The maths is easier to feel with real numbers. Take someone on £100,000 who is offered a £10,000 rise.

• Extra gross pay: £10,000
• Income tax at 40% on the extra pay: £4,000
• Personal Allowance lost: £5,000, which is now taxed at 40%: a further £2,000
• Employee National Insurance at 2%: £200

Take-home from a £10,000 rise: roughly £3,800. You keep under two-fifths of it.

And that's before the knock-on effects, which are often bigger than the tax itself.

The bit that stings more than the tax

Two other things fall away around the same threshold, and they cost families far more than the 60% band.

Tax-Free Childcare and free childcare hours. These are withdrawn once either parent's adjusted net income exceeds £100,000 — not gradually, but as a cliff edge. Cross it by a single pound and the support stops. For a family using a nursery place, the value lost can run into thousands of pounds a year, which means a modest pay rise can genuinely leave you with less money than before.

The High Income Child Benefit Charge. This works on a different threshold and is being reformed, but the principle is the same: higher income claws back a benefit you were previously receiving.

If you have young children, the childcare cliff is usually the thing to plan around first. The 60% tax band is annoying; losing a funded nursery place is expensive.

The two moves that usually fix it

The good news is that the threshold isn't based on your salary. It's based on your adjusted net income — and that's a figure you have some control over.

1. Pension contributions

This is the big one, and it's the reason the £100,000 trap is more of an inconvenience than a disaster for most people who know about it.

Personal pension contributions reduce your adjusted net income pound for pound. Put £10,000 into a pension and, for these purposes, you're treated as having earned £10,000 less.

Applied to the example above: contribute the whole £10,000 rise to your pension and you keep your full Personal Allowance, you avoid the 60% band entirely, and you keep your childcare support. The £10,000 lands in your pension with tax relief on it — effectively the same £10,000 of value, moved from your bank account to your retirement, at a cost of roughly £3,800 of take-home pay.

Framed the other way round: a £10,000 pension contribution from within that band costs you about £3,800 net. Very few things in the tax system are that efficient.

Two practical points:

• How your scheme handles it matters. Salary sacrifice, net pay and relief at source all reduce your taxable income, but they do it at different points and can behave differently for the £100,000 test. Ask your payroll or provider which one you're in.
• There are limits. The annual allowance caps how much you can contribute with tax relief each year, and it can be reduced for very high earners. You may also be able to carry forward unused allowance from the previous three tax years. This is one of the places where getting proper advice pays for itself.

2. Charitable giving through Gift Aid

Gift Aid donations also reduce adjusted net income. If you already give regularly, make sure you're claiming it, and make sure your tax return reflects it. It won't move the needle as much as pension contributions for most people, but it's free to use and often overlooked.

And one thing to be careful of

Bonus timing. If your bonus is what tips you over, ask whether it can be paid into your pension, or whether the timing can be moved into a different tax year. Some employers are relaxed about this; many aren't. It costs nothing to ask, and it's a great deal easier to arrange before the payment than after.

Who this catches

Not just people on six-figure salaries. Adjusted net income includes more than your wages:

• salary and bonus
• rental profit
• dividends and interest above the allowances
• a large one-off gain, such as selling a second property
• redundancy payments above the tax-free amount

Plenty of people sit comfortably below £100,000 on payslip income and cross the line in a single year because of a property sale, a share option vesting, or an unusually good bonus. If that's you, the fix is the same — you just have less time to arrange it.

The one-line summary

Between £100,000 and £125,140 you lose about 60p of every extra pound, and possibly your childcare support on top. Pension contributions bring your income back under the threshold and are, for people in that band, about as tax-efficient as saving gets.

Put your own figures through our Income Tax calculator to see exactly where you sit, and what a contribution would do to the result.

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This article is general financial education, not personal financial advice. The figures used are based on current rules for England, Wales and Northern Ireland; Scottish income tax bands differ. Tax rules depend on your circumstances and can change. Consider seeking regulated financial advice before acting.