A pay rise that takes your income over £100,000 should feel like a win. But for many people, it comes with an unpleasant surprise.
In fact, we often speak to clients who actively try to avoid crossing the £100,000 mark. Why? Because once your income goes over this level, the tax system starts to work against you.
Here’s why the £100,000 threshold is such a big deal – and what you can do about it.
Reason 1: losing your personal allowance
Everyone normally benefits from a personal allowance of £12,570, meaning you can earn that amount before paying income tax.
However, once your adjusted net income goes over £100,000, your personal allowance is gradually withdrawn. For every £2 you earn above £100,000, you lose £1 of your personal allowance.
For example:
- Income of £110,000 reduces your personal allowance to £7,570
- At £125,140, your personal allowance disappears completely
The result? Income between £100,000 and £125,140 is effectively taxed at 60%.
Add in:
- 2% National Insurance
- Possible student loan repayments
- Pension contributions
…and it’s easy to see why many people feel the extra income simply isn’t worth it.
Once you pass £125,140, the marginal tax rate actually drops to 45%, which feels counter-intuitive.
Reason 2: losing valuable childcare support
If you have young children, the £100,000 line can be even more painful.
Free childcare
Working parents may be entitled to 30 hours of free childcare per week (for 38 weeks a year) for children aged nine months to four years. This can save thousands of pounds a year.
However, this support disappears if either partner has adjusted net income over £100,000.
Tax-free childcare
Parents may also benefit from the tax-free childcare scheme, where the Government adds:
- £2 for every £8 you contribute
- Up to £2,000 per child per year (or £4,000 for a disabled child)
Again, this support is lost as soon as one parent earns £100,000 or more.
For many families, crossing the £100,000 threshold can dramatically increase childcare costs overnight.
Can you avoid the £100,000 trap?
In many cases, yes – with the right planning.
Pension contributions
Making personal pension contributions can reduce your adjusted net income below £100,000. This allows you to:
- Keep your personal allowance
- Retain free childcare and tax-free childcare
- Still benefit from the money later in life
Charitable donations
Gift Aid donations to charity also reduce adjusted net income. While this approach is more altruistic, it can be an effective way to stay below the threshold.
The key is planning ahead. Once the tax year ends, it’s often too late to fix the problem.
Final thoughts
The £100,000 threshold is one of the most punishing parts of the UK tax system. Earning more doesn’t always mean taking home more – especially for families.
If you’re close to the £100,000 mark or expecting a bonus or pay rise, getting advice early can make a huge difference.
If you’d like help reviewing your income or planning ahead, get in touch with Jon or the team at Jon Davies Accountants. We’ll help you keep more of what you earn, without the nasty surprises.
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Any questions?
If you’d like a meeting or a video call to discuss this, please get in touch with your favourite Liverpool accountant
- You can ring us on 0151 380 8080
- You can email us at gr****@*********************co.uk