The £100,000 Income Trap: How Tax Planning Can Help High Earners Protect Their Personal Allowance

Many high earners are unaware that earning just over £100,000 can trigger one of the UK’s steepest hidden tax rates — an effective marginal tax rate of 60%.!

For the 2025/26 tax year, anyone with adjusted net income between £100,000 and £125,140 will see their £12,570 personal allowance gradually withdrawn.

How the Personal Allowance Is Reduced

Once your adjusted net income exceeds £100,000, your tax-free personal allowance is reduced by £1 for every £2 earned above this level.

By the time income reaches £125,140, the personal allowance is completely lost — meaning every pound is taxable.

This applies regardless of age or employment type, so even a bonus, dividend, or rental profit could unexpectedly push you into this costly tax band.

What Counts as Adjusted Net Income

Your adjusted net income is your total taxable income before personal allowances, minus certain reliefs such as:

• Pension contributions

• Gift Aid charitable donations

• Trading losses or approved investment reliefs

  
  

How to Avoid the Personal Allowance Trap

Fortunately, with careful tax planning, it’s possible to reduce taxable income and keep your personal allowance intact.

Here are some effective strategies:

• Increase pension contributions – build your retirement fund while reducing your adjusted income below £100,000.

• Make Gift Aid donations – charitable giving provides relief while supporting causes you care about.

• Use tax-efficient investments – such as EIS or VCT schemes (subject to suitability).

These strategies can lower your overall tax burden and maximise your take-home income.

Gift Aid Carry-Back Opportunities

For higher-rate and additional-rate taxpayers, Gift Aid offers an extra advantage. Donations made in the current tax year can be carried back to 2024/25, as long as you make the election before or when submitting your Self Assessment return, and no later than 31 January 2026.

Plan Ahead with Expert Tax Advice from Pandey & Co

If your income is approaching or exceeds £100,000, taking timely advice can prevent unnecessary tax loss.

At Pandey & Co, we specialise in personal tax planning for high earners and business owners in Southampton and across the South Coast.

Our experienced accountants can help you structure your income, pension contributions, and investments efficiently — so you keep more of what you earn.

Contact Pandey & Co today for personalised tax advice and planning strategies to help you retain your personal allowance.