If your adjusted net income is between £100,000 and £125,140, you are in a tax trap known as the Personal Allowance taper. For every £2 you earn above £100,000, you lose £1 of your £12,570 Personal Allowance. By the time income reaches £125,140, the allowance is fully gone. The result: an effective 60% income tax rate on earnings in this band.
Why 60%?
At the 40% higher rate, each additional £1 of income generates 40p of tax. But if that £1 also causes you to lose 50p of Personal Allowance (because £2 earned removes £1 of allowance), the tax on that lost allowance is 50p × 40% = 20p more. Total tax: 40p + 20p = 60p in the pound.
Worked example:
Income rises from £110,000 to £111,000 (an extra £1,000):
- Income tax at 40% on the extra £1,000: £400
- But: Personal Allowance reduces by £500 (losing £500 of 0% band, now taxed at 40%): £200
- Total extra tax: £600 on £1,000 extra income = 60% effective rate
This makes the £100k–£125,140 band the most heavily taxed income range in the UK — above even the 45% additional rate that applies above £125,140.
The Full Picture: Adjusted Net Income
The taper is based on your adjusted net income, not your gross income. Adjusted net income is calculated as:
Gross income − gross pension contributions − Gift Aid donations grossed up
This is extremely useful: by reducing adjusted net income through pension contributions or Gift Aid, you can reduce or eliminate the taper effect.
Strategy 1: Pension Contributions
Making additional pension contributions is the single most effective way to escape the trap. Every £1 contributed to a pension reduces your adjusted net income by £1.
Example: Earn £120,000. Personal Allowance is currently £2,570 (reduced from £12,570 by £10,000 of taper on £20,000 above £100k).
Contribute £20,000 to pension. Adjusted net income falls to £100,000. Personal Allowance is fully restored to £12,570.
Tax saving from restoring the allowance: £12,570 × 40% = £5,028
Plus the standard 40% relief on the contribution itself (£20,000 × 40% = £8,000).
Total tax relief on a £20,000 pension contribution: approximately £13,028 — an effective rate of relief of over 65%.
| Adjusted income | Personal Allowance | Income taxed at 40% |
|---|---|---|
| £100,000 | £12,570 | Normal |
| £110,000 | £7,570 | £5,000 extra band at 40% |
| £120,000 | £2,570 | £10,000 extra band at 40% |
| £125,140+ | £0 | £12,570 extra band at 40% |
Strategy 2: Salary Sacrifice
If your employer offers salary sacrifice, this is even more efficient than a personal pension contribution because:
- Salary sacrifice reduces your gross pay before NI, so you also save the 2% higher rate NI on amounts above £50,270
- Salary sacrifice reduces adjusted net income for the taper calculation automatically (no self-assessment adjustment needed for basic rate employees, though high earners should use self-assessment regardless)
Example: Earn £115,000 and sacrifice £15,000 via salary sacrifice:
- Adjusted net income: £100,000
- Personal Allowance restored: full £12,570
- NI saving: £15,000 × 2% = £300
- Income tax saving from restored allowance: £5,028
- Tax relief on contribution itself: £6,000 (40%)
- Total saving: ~£11,328 on a £15,000 sacrifice
Strategy 3: Gift Aid Donations
Charitable donations made under Gift Aid also reduce adjusted net income. If you make a £10,000 donation to charity via Gift Aid, your adjusted net income is reduced by £12,500 (the grossed-up donation — HMRC adds basic rate relief which the charity claims).
The effective tax relief for a higher rate taxpayer is 40% on the grossed-up amount: £12,500 × 40% = £5,000 — plus the restored Personal Allowance value if this brings you below £125,140.
Gift Aid is less flexible than pension contributions (donations are permanent, not invested), but it is an option for those who give to charity regularly.
What About Bonus Payments?
Many people inadvertently fall into the trap through year-end bonuses pushing income above £100,000. If you are expecting a bonus that will take you over £100,000:
- Ask your employer whether you can take part of the bonus as an employer pension contribution
- If not, consider timing pension contributions to land in the same tax year as the bonus
- Use HMRC’s Self Assessment to reclaim the full relief on contributions made
Self Assessment Is Mandatory Above £100,000
If your income exceeds £100,000, you must complete a Self Assessment tax return regardless of whether you are PAYE-employed. This is the mechanism through which you claim higher rate pension relief and ensure the correct allowance is applied.
HMRC will usually adjust your PAYE tax code to reflect the taper — but this is based on estimates. Your Self Assessment return settles the actual position.
Example: Complete Before and After
Before planning — earning £118,000
- Adjusted net income: £118,000
- Personal Allowance: £12,570 - (£18,000 ÷ 2) = £3,570
- Total income taxed at 20%/40%: calculated on £114,430 above reduced allowance
- Effective income tax: approximately £41,800
After planning — £18,000 pension contribution
- Adjusted net income: £100,000
- Personal Allowance restored: £12,570
- Total income taxed: calculated on £87,430
- Effective income tax: approximately £32,772
- Tax saving: approximately £9,028
The pension is also invested and grows — so this is not a cost, but a redirection of income into a highly tax-advantaged structure.
The Bottom Line
The Personal Allowance taper is a widely misunderstood feature of the UK tax system that creates a genuine 60% effective tax rate on income between £100,000 and £125,140. For those in this band, pension contributions are extraordinarily efficient — every £1 invested provides standard 40% relief plus the value of restored Personal Allowance. If your income is approaching or in this range, taking action is one of the most valuable tax planning steps available. Use our income tax calculator to model your liability with and without pension contributions.