There is a point in the UK tax system where earning more can suddenly feel a lot less rewarding.

That point is £100,000. Not because there is a special 60% tax band written into the tax tables, but because 2 separate rules start working against you at the same time. You are already paying higher-rate tax, and then your tax-free Personal Allowance starts disappearing as your income rises.

This is the so-called £100k tax trap, and for parents it can be even more painful because the same adjusted-net-income threshold can also determine whether you qualify for Tax-Free Childcare and England’s funded childcare for working parents.

How the £100k tax trap actually works

For the 2026/27 tax year, the standard Personal Allowance is still £12,570. That is the amount of income most people can receive before Income Tax starts.

But once your adjusted net income goes above £100,000, HMRC reduces that allowance by £1 for every £2 of income above the threshold. Once adjusted net income reaches £125,140, the Personal Allowance is gone completely.

The strange result is that an extra £1 of income in this band does 2 things. You pay 40p of higher-rate Income Tax on that £1, and because every £2 of extra income removes £1 of Personal Allowance, another 50p becomes taxable at 40%, costing a further 20p.

That is how you get an effective 60% marginal income-tax rate between £100,000 and £125,140 in England, Wales and Northern Ireland.

This is an effective rate created by the withdrawal of the allowance. It is not an official 60% Income Tax band. Scotland has different Income Tax rates, so the exact marginal effect is different there even though the Personal Allowance taper still applies.

A simple example

Imagine your adjusted net income rises from £100,000 to £110,000.

The extra £10,000 is taxed at the 40% higher rate, costing £4,000. But your Personal Allowance also falls by £5,000, which means another £5,000 of income becomes taxable at 40%. That adds another £2,000 of tax.

That leaves £4,000 of the £10,000 before considering National Insurance, student loan repayments or anything else linked to income.

The childcare cliff can make it worse

For parents, £100,000 is more than a tax threshold.

Tax-Free Childcare is not available if either you or your partner expects adjusted net income to be over £100,000 for the current tax year. The same maximum-income rule also applies to England’s Free Childcare for Working Parents scheme.

That means a couple can lose childcare support because one person moves from just below £100,000 adjusted net income to just above it, even if the other partner earns far less.

This is why some parents can face an effective marginal cost far above 60% once the value of lost childcare support is included. The exact hit depends on the age of the child, childcare use and the support you were receiving.

The important phrase: adjusted net income

The £100,000 threshold is not simply your salary.

HMRC uses adjusted net income. Broadly, that starts with taxable income from sources such as employment, self-employment, property, pensions, savings interest and dividends, and then allows certain deductions.

That matters because someone earning a £105,000 salary does not automatically have £105,000 of adjusted net income after every relevant adjustment. Equally, somebody earning £90,000 from employment could still end up above £100,000 once taxable property income, bonuses, savings interest or other income are added.

Why pensions can be so valuable in this band

Pension contributions can reduce adjusted net income, depending on how the contribution is made.

HMRC’s adjusted-net-income guidance specifically includes deductions for qualifying pension contributions and grossed-up relief-at-source contributions. In practical terms, this can make pension saving unusually valuable for somebody sitting in the £100,000 to £125,140 range.

Suppose your adjusted net income before a pension contribution is £110,000. If an eligible gross pension contribution brings adjusted net income back to £100,000, you can potentially restore the full Personal Allowance as well as receiving the normal tax relief associated with the pension contribution.

For 2026/27, the standard pension annual allowance remains £60,000, although separate rules can reduce it for very high earners and for people who have flexibly accessed defined-contribution pensions. Pension tax is complicated enough that I would not blindly make a large contribution purely because an online calculator says “60% relief”.

Salary sacrifice can also matter

Some employers allow salary sacrifice for pension contributions. Under a valid arrangement, you give up part of your contractual cash salary in exchange for an employer pension contribution.

Because the cash salary itself is reduced, salary sacrifice can potentially reduce taxable pay and adjusted net income. It may also change National Insurance costs. But it can affect things linked to contractual salary, including mortgage affordability calculations, life cover or employer benefits, depending on how your workplace scheme operates.

It also has to be arranged properly with the employer. You cannot usually wait until after the tax year ends and retrospectively decide that salary already paid should have been sacrificed.

Gift Aid can reduce adjusted net income too

Gift Aid donations are another adjustment people often forget.

HMRC deducts the grossed-up Gift Aid amount when calculating adjusted net income. So a £800 donation made under Gift Aid is treated as £1,000 for this purpose because the charity claims the basic-rate tax element.

That does not mean donating to charity is a money-making tax strategy. You are still giving money away. But if you were already going to make the donation, the adjusted-net-income effect is worth understanding.

What happens above £125,140?

Once adjusted net income reaches £125,140, the Personal Allowance has been fully removed.

For England, Wales and Northern Ireland, the unusual 60% marginal Income Tax effect therefore ends at that point. Income above the additional-rate threshold is then generally taxed at 45% for non-savings, non-dividend income under the main rates.

That creates one of the strangest shapes in the UK tax system: the marginal Income Tax rate effectively rises from 40% to 60% between £100,000 and £125,140, then falls to 45% once the allowance is fully gone.

*Main 2026/27 rates for non-savings, non-dividend income in England, Wales and Northern Ireland. This table excludes National Insurance and other income-linked charges.

Why frozen thresholds keep dragging more people into it

The Personal Allowance remains £12,570 for 2026/27 and is also fixed at that level for 2027/28 under current legislation. The £100,000 income limit for tapering the allowance has also stayed unchanged.

That means pay rises and inflation can pull more people into the £100k zone even without the government announcing a new tax rate. A £100,000 salary today is worth less in real terms than it was when this threshold was first introduced, but the tax mechanism still starts at the same nominal number.

What I would do before crossing £100,000

I would not turn down a pay rise simply because of this trap. More income is still more income. But I would stop treating gross salary as the only number that matters.

I would estimate total taxable income for the year, including bonuses, property income, savings and dividends. Then I would calculate adjusted net income and check whether any pension contributions or Gift Aid donations already planned change the result.

If childcare support is involved, I would check eligibility before the year-end rather than discovering the problem after income has already landed. And if I was considering a large pension contribution, I would check annual-allowance rules and whether salary sacrifice or relief-at-source treatment changes the numbers.

The £100k trap is not a reason to earn less. It is a reason to understand adjusted net income before the tax year is over.

This article is general information, not personalised tax advice. The right strategy depends on the source of your income, your pension arrangements, family circumstances and whether you live in Scotland or elsewhere in the UK.

I cover personal finance, tax, property and investing on The Anxious Investor on YouTube and TikTok.

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Written by Aren Deu | The Anxious Investor