The £100,000 Tax Trap — 60% Marginal Rate Explained
Earning between £100,000 and £125,140? Every extra £1 costs you 60p in tax. Here is what is happening and how to escape it.
Why the effective rate reaches 60%
Your Personal Allowance (the amount you earn tax-free) is normally £12,570. But once your income exceeds £100,000, HMRC claws it back at a rate of £1 for every £2 you earn above that threshold.
This means on each £2 of income above £100,000, you pay 40p Higher Rate tax on it directly, plus lose £1 of Personal Allowance which was shielding another £1 from 40% tax — that costs another 40p. Total: 80p on every £2 = 60% effective rate.
At £125,140 the Personal Allowance is entirely gone. Above that, you are back to paying 45% Additional Rate.
Calculate Your Tax Trap Position
Pension reduces your Adjusted Net Income
Gross Income
£120,000
Pension Contrib
£0
Adj. Net Income
£120,000
Personal Allowance
£2,570
Income Tax
£37,432
National Insurance
£4,411
Take-Home (Year)
£78,157
Take-Home (Month)
£6,513
⚠️ You are in the 60% tax trap zone
Your Adjusted Net Income of £120,000 means your Personal Allowance has been reduced to £2,570. Contributing an extra £20,000 to your pension would restore your full Personal Allowance and save you approximately £0 in tax.
Effective Tax Rates Around the £100k Threshold
| Income | Income Tax | NI | Take-Home | Effective Rate |
|---|---|---|---|---|
| £95,000 | £25,432 | £3,911 | £65,657 | 30.9% |
| £100,000 | £27,432 | £4,011 | £68,557 | 31.4% |
| £105,000 ⚠️ | £29,932 | £4,111 | £70,957 | 32.4% |
| £110,000 ⚠️ | £32,432 | £4,211 | £73,357 | 33.3% |
| £115,000 ⚠️ | £34,932 | £4,311 | £75,757 | 34.1% |
| £120,000 ⚠️ | £37,432 | £4,411 | £78,157 | 34.9% |
| £125,140 | £40,002 | £4,513 | £80,625 | 35.6% |
| £130,000 | £42,189 | £4,611 | £83,200 | 36.0% |
Frequently Asked Questions
What is the £100k tax trap?
When your income exceeds £100,000, HMRC reduces your Personal Allowance by £1 for every £2 earned above that threshold. This creates an effective marginal tax rate of 60% on earnings between £100,000 and £125,140, because you pay 40% Higher Rate tax plus lose 40% worth of allowance.
How can I avoid the 60% tax trap?
The most common strategy is to make pension contributions to reduce your Adjusted Net Income below £100,000. For example, on a £120,000 salary, contributing £20,000 to a pension (salary sacrifice or SIPP) brings your taxable income to £100,000 and restores your full Personal Allowance.
Does this affect Scottish taxpayers?
Yes. Scottish taxpayers face the same Personal Allowance taper above £100,000, though their income tax rates differ. The effective marginal rate in the taper zone is higher in Scotland due to the 42% and 45% higher rates.
What is Adjusted Net Income?
Adjusted Net Income (ANI) is your total taxable income minus certain reliefs, including pension contributions and Gift Aid donations. HMRC uses ANI (not gross salary) to determine Personal Allowance tapering.