The £100k trap: why a pay rise can cost you money

A quirk in the UK tax code creates an effective marginal rate of around 62% on income between £100,000 and £125,140. Crossing into this band can mean a smaller take-home pay rise than the headline number suggests.

How the taper works

Every UK taxpayer has a personal allowance — income you can earn tax-free. In 2026/27 that is £12,570 (frozen at this level until April 2031).

When your income crosses £100,000, that allowance starts to disappear. For every £2 earned above £100,000, you lose £1 of personal allowance. The allowance reaches zero at £125,140.

Inside this £25,140 band:

• You pay 40% income tax on the income itself.
• You also lose tax-free allowance as you go — effectively another 20% (40% of the vanishing allowance).
• NI adds 2% above £50,270.

The marginal rate on every pound between £100k and £125,140 lands at ~62%. (Scottish taxpayers see a higher rate in this band — closer to 67.5% before NI — because Scotland’s 45% advanced rate applies above £75,000.)

A £5,000 raise from £105k to £110k leaves around £1,900 in your pocket and £3,100 to HMRC.

Marginal rate vs effective rate

Most salary calculators show an effective tax rate — total deductions averaged across the whole salary. At £110k that average lands around 33%.

The marginal rate — the rate on the next pound earned — is what matters when you are deciding whether to take a raise, switch jobs, or accept a bonus. Inside the taper zone, that marginal rate is 62%.

Legal ways to manage the band

None of these are clever accounting — they are how the UK tax code is designed to work.

Pension salary sacrifice

If your employer offers salary sacrifice for pension contributions, every pound you redirect reduces your taxable income. Salary-sacrifice £10,000 into your pension from a £110k salary:

• Taxable salary drops to £100k — out of the taper band.
• Personal allowance restored in full.
• Roughly £6,000–£6,200 saved in tax and NI on that £10,000 (varies with employer NI sharing and whether you are a Scottish taxpayer).
• The £10,000 sits in your pension instead of your current account.

The most efficient pound-for-pound tax move available to higher earners.

Gift Aid donations

HMRC bases the taper on Adjusted Net Income (ANI) — your gross income less reliefs like personal pension contributions and Gift Aid. A Gift Aid donation reduces ANI by 1.25× the amount you give (the basic-rate gross-up).

A £1,000 Gift Aid donation from someone earning £110k cuts their ANI by £1,250. Small donations rarely shift the taper materially; planned charitable giving can.

Childcare entitlements

If you have children under 12, crossing £100k means you lose Tax-Free Childcare (up to £2,000 per child per year) and funded childcare hours — up to 30 hours/week for under-5s. Most parents at this income have already crossed the High Income Child Benefit Charge between £60,000 and £80,000, so the £100k cliff is the third income-tested loss in a row.

This is a separate cliff, not part of the 62% calculation. For a family with two young children, the support lost at £100k can run from £4,000 (TFC alone) into five figures once funded hours are counted in high-cost areas. The real effective rate inside the band can exceed 80% for these families.

Pension sacrifice to just below £100,000 reclaims the childcare support along with the tax.

What this is and is not

This is not an argument against earning over £100k. Even at a 62% marginal rate, 38p of every pound is yours. A £110k job pays more take-home than a £100k job — just less than the headline implies.

It also is not an argument for putting everything into pension. Pension contributions are locked away until age 57. The right answer is usually a mix.

The point is to see the band clearly before making decisions inside it.