The £100,000 tax trap: why some earners pay 60% tax

Everyone has a Personal Allowance of £12,570 — income you pay no tax on. Once your adjusted net income passes £100,000, you lose £1 of that allowance for every £2 you earn above the threshold. At £125,140 it is gone completely.

So each extra £100 earned in that band is taxed at 40%, and also removes £50 of allowance, which is then taxed at 40% too. The result is £60 of tax on £100 — an effective rate of 60%, before National Insurance. The thresholds are frozen, so more people drift into the band each year as pay rises.

For parents the cost can be larger than the tax. If either parent's adjusted net income is over £100,000, the household loses Tax-Free Childcare (worth up to £2,000 per child a year) and eligibility for the working-parent free childcare hours. One pound over the line can cost thousands.

Adjusted net income is reduced by pension contributions. Paying more into a pension — through salary sacrifice or personal contributions — can bring income back under £100,000, restoring the Personal Allowance and, for parents, childcare support.

Because the money would otherwise be taxed at an effective 60%, the cost of each pound saved into a pension in this band is unusually low. Whether that suits you depends on when you need the money, your annual allowance and your wider plans — which is the sort of decision an adviser can help you get right.