Question 1

What is the £100k personal allowance trap?

Accepted Answer

Once your adjusted net income exceeds £100,000, HMRC tapers your personal allowance (£12,570 for 2025/26) by £1 for every £2 you earn above £100,000. It is completely gone at £125,140. Every pound you earn in that £25,140 window is effectively taxed at 60% — 40% income tax plus another 20% because the lost allowance creates extra taxable income.

Question 2

Why is the marginal tax rate 60% between £100k and £125,140?

Accepted Answer

For every £2 earned in this band, you pay 40% income tax on those £2 (= 80p) and also lose £1 of personal allowance, which brings another pound into tax at 40% (= 40p). Total tax on £2 earned = £1.20 — an effective rate of 60%. This is why many accountants call it a 'hidden tax band' — it doesn't appear on HMRC rate tables but it's very real.

Question 3

How do pension contributions fix the £100k trap?

Accepted Answer

Pension contributions reduce your adjusted net income. If you earn £115,000 and contribute £15,000 to a pension, your adjusted net income falls to £100,000, restoring your full personal allowance. The effective return on that £15,000 pension contribution is 60% immediate tax relief — the highest relief available to UK taxpayers outside of specific investment schemes.

Question 4

How does Gift Aid reduce adjusted net income?

Accepted Answer

When you make a Gift Aid donation, HMRC grosses it up by 25% when calculating your adjusted net income. For example, a £4,000 Gift Aid donation is treated as £5,000 for adjusted net income purposes. This means Gift Aid and pension contributions both work as tools to bring you below the £100,000 threshold. You can combine them — e.g. £8,000 pension + £1,600 Gift Aid to escape the trap.

Question 5

Who is affected by the personal allowance trap?

Accepted Answer

Anyone with adjusted net income between £100,000 and £125,140. This includes salary, bonuses, dividends, rental income, freelance income, and most other taxable receipts. Employees receiving bonuses that push them into this range, company directors drawing dividends, and landlords with growing rental portfolios are all commonly affected.

Question 6

What is 'adjusted net income' and how is it calculated?

Accepted Answer

Adjusted net income is your total income minus certain reliefs: mainly pension contributions and grossed-up Gift Aid donations. It is the figure HMRC uses to test whether you are in the personal allowance taper zone — not your raw gross income. This means even if your payslip shows £110,000, a sufficient pension contribution can bring your adjusted net income to £100,000.

Question 7

What is the pension annual allowance — can I contribute enough to escape?

Accepted Answer

The pension annual allowance for 2025/26 is £60,000 (or 100% of earnings if lower). For most people earning between £100k and £125k the required contribution to escape the trap is well within this limit. If you have unused allowance from the previous three tax years you can carry it forward, potentially allowing larger contributions. Your pension provider or a financial adviser can confirm your exact available allowance.

£100k Personal Allowance Trap Calculator 2025/26

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