The £100k tax trap, explained

Most people who hit £100k assume the next pound they earn is taxed at 40%. It isn't. Between £100k and £125,140 it's taxed at an effective 60%, plus 2% NI. The reason is mechanical, not political — and once you see the mechanic, the fix is obvious.

Here's what's happening. Your personal allowance — the £12,570 of income that's normally tax-free — is reduced by £1 for every £2 you earn over £100,000. By the time you're earning £125,140, the entire allowance is gone. So in that band you're paying 40% income tax on the new pound, AND losing 50p of allowance which gets taxed at 40%. Hence 60%.

For a parent of young kids, it gets worse. The 30 hours of free childcare entitlement (now 15 hours from age 9 months) cuts off completely at £100k of adjusted net income. That's a cliff edge, not a taper — a £101k earner can pay £15k+ more in childcare than a £99k earner. The economics are nonsensical but the rules are real.

Salary sacrifice into pension. The principle: trade gross salary above £100k for an employer pension contribution of the same amount. You skip the income tax, you skip the NI, your employer often passes their NI saving in too, and the money goes to work for decades compounding. For a parent of under-fives, salary sacrificing back under £100k also restores the childcare hours.

The arithmetic is so one-sided in this band that doing nothing is almost always the wrong move. The only honest reason not to do it is if you actually need the cash now — for a house deposit, to clear a high-interest debt, or for something specific.