The 100k Tax Trap – Why Earning Over £100,000 Can Mean a 60% Tax Rate in the UK
If you have ever heard people talk about the “£100k tax trap” and assumed it was just one of those exaggerated tax myths, it isn’t. It is a very real feature of the UK tax system, and it catches more people every year.
Most people know that the highest rate of Income Tax in the UK is 45%. So naturally, you would expect that to be the most you could ever pay. In reality, if your income falls between £100,000 and £125,000, you can face an effective tax rate of 60% on that slice of income.
That sounds odd at first. How can you pay 60% tax when the top rate is 45%? The answer lies in how the Personal Allowance works.
What Happens After £100,000?
Everyone is entitled to a tax-free Personal Allowance. This is the portion of your income you can earn before paying Income Tax.
However, once your taxable income exceeds £100,000, you start to lose that allowance. For every £2 you earn above £100,000, you lose £1 of your Personal Allowance.
By the time your income reaches £125,000, your Personal Allowance has been completely removed.
At first glance, you might assume this simply means you will pay 40% tax on income above £100,000. Unfortunately, the impact is more significant than that.
Why the Effective Rate Is 60%
Between £100,000 and £125,000, two things happen at the same time.
First, you pay 40% tax on the additional income itself.
Second, because you are losing your Personal Allowance, more of your income that would previously have been tax free now taxed at 40%. The effect is to increase the tax rate by 20% only because of the “lose £1 of your personal allowance for every £2 over” rule.
So you are not just paying 40% on the extra income. You are also indirectly increasing the tax on income you have already earned, because the allowance that protected it has disappeared.
When you work through the numbers, the combined effect is an effective tax rate of 60% on that £25,000 band of income. In practical terms, for every £1 earned in that range, you keep just 40p.
It is not a headline tax rate, but it is a genuine outcome of how the system operates.
Why More People Are Being Affected
This issue is becoming more common because of fiscal drag. Tax thresholds and allowances have not been rising in line with inflation. As salaries increase over time, more individuals are being pushed past the £100,000 mark, even if they do not necessarily feel significantly better off in real terms.
The threshold itself has not moved with inflation, so individuals who may not consider themselves particularly high earners are finding that they have entered this 60% zone.
It is one of the more unusual quirks of the UK tax system, and many people only discover it after a pay rise or bonus does not deliver the increase in take-home pay they were expecting.
Is It Really a Trap?
In many cases, yes, it is a tax trap.
A number of people actively try to manage their income so that it does not exceed £100,000 in a tax year. This is not about doing anything aggressive or improper. It is simply about understanding how the rules work and avoiding paying an effective 60% tax rate on part of your earnings if sensible planning can prevent it.
The key point is awareness. If you do not know this rule exists, you cannot plan for it.
The Takeaway
If someone asked you what the highest tax rate in the UK is, you would probably say 45%. Technically that is correct. In practice, for income between £100,000 and £125,000, the effective rate is 60% which is why it is dubbed the ‘£100k Tax Trap’.
It is one of those anomalies in the tax system that does not always get much attention until it affects you directly. If your income is approaching £100,000, or you have recently crossed it and are wondering why your take-home pay has not increased as much as expected, it is worth taking a closer look.
Understanding how this band works is the first step in making informed decisions about your income and avoiding an unpleasant surprise at the end of the tax year.
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