UK’s £100,000 Tax Trap Widens as Allowance Stays Frozen, June 10

The UK’s personal allowance threshold remains frozen at £100,000 for the 2026/27 tax year, according to HMRC announcements. This means earners above this level lose £1 of their £12,570 allowance for every £2 earned, creating an effective 60% marginal tax rate between £100,000 and £125,140. As wages rise, more people will be caught in this trap.

How the 60% Tax Trap Works

Everyone in the UK gets a personal allowance of £12,570 before income tax applies. Once adjusted net income exceeds £100,000, the allowance withdraws at £1 for every £2 earned. By £125,140, the allowance disappears entirely. This creates a combined 60% effective rate on that £25,140 slice: 40% higher-rate income tax plus 20% lost allowance. The frozen threshold means this trap catches more earners each year as salaries increase.

Who Faces the Biggest Risk

Consultants billing through limited companies and drawing large year-end dividends face the highest exposure. Partners in professional firms with fluctuating profit shares also suffer. Property sellers realising one-off gains alongside employment income are particularly vulnerable. Anyone with combined salary, bonus, dividends, and freelancing profits between £100,000 and £140,000 sits squarely in the danger zone. The taper uses adjusted net income, making it unforgiving for those with multiple income streams.

Legal Ways to Reduce Your Tax Bill

Boosting pension contributions offers the classic defence. Contributing £25,140 to a pension reduces income to £100,000, restoring the full allowance and creating an effective 60% tax relief. The annual pension allowance stands at £60,000 for 2025/26. However, high earners face a separate pension allowance taper: for every £2 of adjusted income over £260,000, the allowance falls by £1, down to a minimum of £10,000. Other strategies include gifting money to reduce adjusted net income or using tax-free allowances like ISAs, which permit £20,000 annual deposits with tax-free returns.

Childcare Benefits and Limited Company Options

Families with young children lose valuable childcare benefits once income exceeds £100,000. Some high earners use limited companies to route private income, which can help avoid the trap and preserve childcare support. Routing income through a company allows flexibility in dividend timing and salary splitting with a spouse. Tax-free savings vehicles like fixed-rate ISAs also help, offering guaranteed returns without income tax on interest earned. These strategies require professional advice to ensure compliance with anti-avoidance rules.

Final Thoughts

The frozen £100,000 threshold will trap thousands more earners in the 60% tax band as wages rise. Pension contributions and tax-free allowances offer legal relief, but professional planning is essential to avoid overpaying tax.

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The content shared by Meyka AI PTY LTD is solely for research and informational purposes.  Meyka is not a financial advisory service, and the information provided should not be considered investment or trading advice.