The £100,000 Tax Trap

Most people know about the 20%, 40% and 45% income tax bands. Far fewer realise there's an effective 60% band hidden between £100,000 and £125,140 — and if you have young children, crossing £100,000 can cost you thousands more.

What the £100k tax trap actually is

The personal allowance — the £12,570 you can earn tax-free in 2026/27 — doesn't apply to everyone. Once your income passes £100,000, you lose £1 of it for every £2 you earn above that line. By £125,140 it has gone entirely.

That withdrawal is invisible but brutal. On every pound between £100,000 and £125,140 you pay 40% higher-rate tax plus an extra 20% from the disappearing allowance — an effective 60% rate, or 62% once employee National Insurance is added. In Scotland it is closer to 69.5%. And because the £100,000 threshold has been frozen since 2010 and stays frozen until April 2031, more people are pulled in every year.

For parents, it's not 60% — it's a cliff edge

This is the part most high earners miss until it is too late. The £100,000 line is also the hard cut-off for two government childcare schemes:

• Tax-free childcare — up to £2,000 per child, per year
• 30 hours of funded childcare — for children aged 9 months to 4 years in England

The fix: salary sacrifice

Here is the lever. Both childcare schemes and the personal allowance taper are based on your adjusted net income — and pension contributions made by salary sacrifice reduce it, pound for pound. Sacrifice enough to bring your income back under £100,000 and you restore your full personal allowance and your childcare eligibility, while the money lands in your pension instead of vanishing in tax.

Before you do it — five things to check

• Annual allowance: you can normally pay up to £60,000 a year into pensions across all schemes. Above roughly £200,000 income this tapers down.
• Minimum wage: sacrifice cannot drop your pay below the National Minimum Wage (rarely an issue at these incomes).
• Mortgage and statutory pay: sacrifice lowers your payslip salary, which can affect mortgage affordability and statutory maternity/paternity pay — time it carefully if either is imminent.
• Self-assessment: once you earn over £100,000 you must file a self-assessment return, even on PAYE.
• The 2029 change: from April 2029 the National Insurance saving on salary-sacrificed pension contributions is capped at £2,000 a year. The income-tax relief — the part that fixes this trap — is unaffected.

Frequently asked questions

Does the 60% rate really apply to me?

If your adjusted net income falls between £100,000 and £125,140, yes — every pound in that band is taxed at an effective 60% (62% with employee NI). Below £100,000 or above £125,140 the effect disappears, which is exactly why bringing your income to £100,000 is so valuable.

Is this legal?

Completely. Salary sacrifice is an HMRC-recognised arrangement and reducing your adjusted net income through pension contributions is standard, legitimate planning — not avoidance.

What if my employer doesn't offer salary sacrifice?

Personal pension contributions and Gift Aid donations also reduce adjusted net income and can achieve the same personal-allowance result, though salary sacrifice is the most efficient because it saves National Insurance too. Ask your HR team whether a scheme is available.

This is general information, not personal financial advice. Tax rules change and individual circumstances vary — consider speaking to an Independent Financial Adviser before making pension decisions. Capital is at risk with any investment.