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The £100,000 cliff edge

All things being equal, receiving a pay rise which takes your income over £100,000 would be seen as a cause for celebration. However, all things are not equal, and as press reports attest, some people would rather turn down a promotion or cut their hours than take their earnings over £100,000.

We explain why this is.

Reason 1 – loss of the personal allowance

Individuals have a personal allowance of £12,570, allowing them to earn £12,570 before they pay tax. However, once their income exceeds the personal allowance income limit, their personal allowance starts to reduce. The personal allowance income limit is £100,000, unchanged since its introduction.

Where adjusted net income exceeds £100,000, the personal allowance is reduced by £1 for every £2 by which adjusted net income exceeds £100,000. A person with adjusted net income of £110,000 will only receive a personal allowance of £7,570 (£12,570 – ((£110,000 – £100,000)/2)).

Once a person’s adjusted net income reaches £125,140, their personal allowance is lost entirely so that they pay tax from the first pound that they earn.

The combined effect of the loss of the personal allowance and paying tax at the higher rate of 40% means that the marginal rate of tax between £100,000 and £125,140 is 60%. Add to that National Insurance of 2% and possibly student loan deductions of 9% or 15% and maybe pension contributions, the taxpayer does not actually keep much of the money that they earn between £100,000 and £125,140. Easy to see why some may deem the extra hours or workload as not being worthwhile.

Once income reaches £125,140, the marginal tax rate drops to 45% (the additional rate).

Reason 2 – loss of free childcare and tax-free top-up

Working parents may be able to receive free childcare for children from the age of nine months to four years for 30 hours a week for 38 weeks of the year. This is valuable. However, it is only available as long as neither partner has adjusted net income of more than £100,000. Thus, once income reaches £100,000, free childcare is lost.

Working parents may also be able to benefit from the Government’s tax-free childcare scheme which provides up to £2,000 a year towards childcare costs (and up to £4,000 a year if the child is disabled). Under the scheme, the Government provides a £2 tax-free top-up for every £8 that the parents deposit in a dedicated account, up to the £2,000/£4,000 maximum top-up. However, as with free childcare, tax-free childcare is not available where either partner earns £100,000 or more.

For parents with young children, earning £100,000 or more will significantly increase their childcare costs.

Beating the system

There is a way to have the benefit of earning more than £100,000 a year and keeping your personal allowance, free childcare and the tax-free top-up. This is by making personal pension contributions to reduce your adjusted net income to below £100,000. You will still get the benefit of the money eventually, while retaining the personal allowance and childcare benefits.

The more altruistic can make charitable donations to reduce adjusted net income to below £100,000, which works in the same way.

07/01/2026