If your adjusted net income is between £100,000 and £125,140, you lose £1 of your tax-free personal allowance for every £2 you earn over £100,000. Added to 40% higher rate tax, that creates an effective rate of 60% on that slice of income, or 62% once employee National Insurance is included. Pension contributions and Gift Aid donations reduce adjusted net income, so they can bring some or all of the allowance back.
What is the £100,000 tax trap?
Most people can earn £12,570 a year before paying any income tax. This is the personal allowance, and it has been frozen at that level since April 2021. The government has extended the freeze until April 2031.
Once your adjusted net income goes over £100,000, the allowance starts to shrink. For every £2 of income above £100,000, you lose £1 of allowance. By the time your income reaches £125,140, the allowance has gone completely. Because thresholds are frozen while pay rises, more people find themselves in this band each year, often after a pay rise or a good bonus.
How does a 60% tax rate happen?
It is easiest to see with an example. Sarah is employed on a salary of £110,000 in 2026/27. Look at what happens to the £10,000 she earns above £100,000.
Example
- Higher rate tax on the extra £10,000 at 40%: £4,000
- Personal allowance lost: £5,000, which is now taxed at 40%: £2,000
- Total income tax on the extra £10,000: £6,000, an effective rate of 60%
- Employee National Insurance at 2%: £200
- Sarah keeps £3,800 of the £10,000, an effective rate of 62%
The 60% figure is not an official tax band. It is the effective rate you pay on income in this range because two things happen at once: the income is taxed at 40%, and part of your allowance becomes taxable too.
What counts as adjusted net income?
Adjusted net income is the figure HMRC uses to decide whether you lose any allowance. It starts with your total taxable income, which includes salary, bonuses, taxable benefits, dividends, rental profits and savings interest. Certain payments are then taken off, including:
- the gross amount of personal pension contributions paid with tax relief at source
- the gross amount of Gift Aid donations to charity
- certain trading losses
Pension contributions made through salary sacrifice, and contributions your employer pays for you, are never counted as your income in the first place, so they keep the figure lower too.
What else do you lose above £100,000?
The allowance is not the only thing at stake. Tax-Free Childcare, where the government adds £2 for every £8 you pay in, up to £2,000 a year for each child (£4,000 for a disabled child), is not available if either parent has adjusted net income over £100,000. The same limit applies to the funded childcare hours for working parents in England. For a family with young children, earning just over the line can cost thousands of pounds a year in lost support on top of the extra tax.
How can pension contributions help?
Pension contributions are the most common way to reduce adjusted net income. Going back to Sarah:
Example
- Sarah pays £8,000 into a personal pension
- Her pension provider claims £2,000 of basic rate tax relief, so £10,000 goes into her pension
- Her adjusted net income falls from £110,000 to £100,000, so her full personal allowance returns
- She claims further relief through her tax return, which reduces her tax bill by £4,000
- Total tax relief: £6,000. The cost to Sarah: £4,000 for £10,000 in her pension
If her employer offers salary sacrifice, she could also save National Insurance. From April 2029, the National Insurance saving on salary sacrifice pension contributions is due to be capped at £2,000 a year of sacrificed salary.
Pensions come with rules to weigh up. The money cannot normally be taken until age 55, rising to 57 from 6 April 2028. Total contributions each year normally count towards the £60,000 annual allowance, which is lower for some very high earners. From 6 April 2027, most unused pension funds are due to be included in your estate for inheritance tax. You can use our retirement shortfall calculator to see where extra contributions might take you.
Are there other ways to reduce adjusted net income?
There are, and each comes with its own trade-offs:
- Gift Aid donations reduce adjusted net income in the same way as personal pension contributions.
- If you own a limited company, the mix of salary, dividends and employer pension contributions can change your adjusted net income considerably.
- The timing of a bonus or dividend can decide which tax year the income falls into.
- Couples sometimes share income-producing assets, though a transfer has to be a genuine gift and can have wider consequences.
While investing can help your money grow over time, it’s important to remember that the value of investments can go down as well as up, and it is not guaranteed.
Is it worth getting advice?
The right answer depends on more than the tax saving. Your cash flow, your plans for the next few years, your family and the rest of your finances all matter. That is where a joined-up view helps. To see how the taper affects your own figures, try our £100,000 tax trap calculator.
It is important to remember that the tax treatment depends on your individual circumstances and may be subject to change in the future.
Frequently asked questions
At what income do you lose all of your personal allowance?
In 2026/27, the personal allowance is lost completely once adjusted net income reaches £125,140.
Is the 60% tax rate an official tax band?
No. It is an effective rate. Income between £100,000 and £125,140 is taxed at 40% and also reduces your personal allowance, which together works out at 60%.
Do pension contributions reduce adjusted net income?
Yes. The gross amount of personal pension contributions paid with tax relief at source is deducted. Employer contributions and salary sacrifice are never counted as your income in the first place.
Can I lose Tax-Free Childcare by earning over £100,000?
Yes. Tax-Free Childcare and the funded childcare hours for working parents are not available if either parent has adjusted net income over £100,000.
Start with a conversation
If any of this sounds like your situation, start with a conversation. Call the office on 020 3751 5680, email office@lucro.co.uk or book a time at lucro.co.uk/contact. We will look at the whole picture, your business, your family and your plans, and tell you plainly what we think.
This article is for general information and is not personal advice. It reflects our understanding of the rules for the 2026/27 tax year for taxpayers in England, Wales and Northern Ireland. Income tax bands differ in Scotland. Tax rules can change, and how they apply to you depends on your individual circumstances.
Approver Quilter Financial Services Ltd. October 2026
Further reading
Official guidance: HMRC guidance on adjusted net income; Income Tax rates and Personal Allowances; and pension annual allowance.