What is the Personal Allowance Tax Trap?
- Gregory Deer
- Feb 12
- 2 min read
Updated: Mar 4
If you have income above £100,000, you may be caught by the ‘personal allowance tax trap’.
You’ll start losing your personal allowance and could face an effective income tax rate of 60%.
Here’s how it works and what you can do about it.
How the Personal Allowance Tax Trap Works
UK taxpayers start by being entitled to a tax-free personal allowance of £12,570.
However, for those with incomes over £100,000, this allowance is reduced by £1 for every £2 earned above this threshold. This means that by the time your income reaches £125,140, your entire personal allowance is gone.
As a result, every extra £1 earned in this range is effectively taxed at:
40% income tax (higher rate tax)
20% extra, due to a loss of the personal allowance (because each £2 over £100,000 removes £1 of the tax-free amount, this £1 is then taxed at 40%)
Combined, this can lead to a 60% marginal tax rate, or 62% if you include national insurance contributions for employees in this range. Much higher than even the top 45% rate for incomes above £125,140.
How to Reduce the Impact
If you’re in this income range, there are strategies to reduce your exposure:
1. Make pension contributions
Contributions to a pension reduce your taxable income, helping you regain some or all of your personal allowance.
2. Use salary sacrifice
If your employer offers a salary sacrifice scheme, arranging for part of your salary to go into benefits such as pensions or childcare vouchers can lower your taxable earnings. However, the lower salary may impact the amount you are able to borrow and affect some state benefits
3. Gift Aid Donations
Charitable donations made through Gift Aid can reduce your adjusted income for tax purposes.
Final Thoughts
If you’re earning over £100,000, careful tax planning can save you thousands. Consulting a financial planner (like us!) can help you optimise your income and minimise tax.
Want to keep more of your hard-earned money? Book a call with us below to get started.
Please note, A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. The Financial Conduct Authority does not regulate tax planning.