The £100k Tax Trap: How High Earners Lose Their Personal Allowance

Aug 25

2 min read

The UK income tax system has a band where the effective rate is considerably higher than any headline rate. Many people move through it without realising.

What happens

Once income passes a defined threshold, the tax-free personal allowance is gradually withdrawn. Because you lose allowance as well as paying tax on the additional income, the effective rate on that slice of earnings is far higher than the marginal rate suggests — one of the highest effective rates in the system.

Who it affects

Anyone whose income crosses the threshold: salaried professionals with bonuses, directors taking dividends, and people whose income is uneven — a good year, a one-off payment, or the sale of an asset can push them into the band unexpectedly.

What can affect the figure

Pension contributions, which for many people are the most straightforward lever available.
Charitable giving under gift aid.
How and when income is taken, particularly for directors with some control over timing.
Whether income can be shared with a spouse or civil partner where genuinely appropriate.

Why it is worth checking

Because the effect is invisible on a payslip. People notice the tax they pay; they rarely notice the allowance they quietly lost. Anyone whose income sits near the threshold should be running the numbers before the tax year ends, not after.

If nobody has run these numbers for your company, that's exactly what we do. Book a free, no-obligation call at www.dmfinancialplanning.co.uk.

Important information

This article is for general information only and does not constitute personal financial advice. The value of investments can fall as well as rise and you may get back less than you invest. Tax treatment depends on individual circumstances and may change. A pension is a long-term investment; funds cannot normally be accessed until age 55 (57 from 2028). DM Financial Planning is a trading style of Aegis Financial Planning Limited, authorised and regulated by the Financial Conduct Authority (FCA No. 624298).