When you’ve worked hard to earn a salary over £100k, it’s something you can really be proud of. But there are some changes to be aware of when you reach this milestone figure.
So, what happens when your salary goes over £100k? The main change to note is that you’ll start losing your tax-free Personal Allowance: £1 for every £2 you earn above £100,000. If you’re a parent, there are additional changes to childcare to be aware of, too.
In this blog, we’ll go over what happens when your salary goes over £100k and how you can reduce the impact.
What Are the Tax Implications of Earning Over £100k?
Looking at the table below, you might be fooled into thinking there is no discernible difference in your tax rate for earning £100,000.
The table suggests you stay in the higher rate band, paying 40% on earnings between £50,271 and £125,140. What it doesn’t show is the effective 60% rate that kicks in once you pass the £100,000 mark.
| Income Tax Rates for England, Wales and Northern Ireland | ||
| Income | Tax Rate | Band |
| Up to £12,570 | 0% | Personal Allowance |
| £12,571 to £50,270 | 20% | Basic Rate |
| £50,271 to £125,140 | 40% | Higher Rate |
| Over £125,140 | 45% | Additional Rate |
Tax rates are liable to change in the annual Budget, so please check the prevailing rates at the time of reading.
Once you reach £100,000, HM Revenue & Customs (HMRC) starts reducing your Personal Allowance, the amount you can earn before paying any income tax. Your Personal Allowance is reduced by £1 for every £2 of income over £100,000.
So, if you would normally receive the full Personal Allowance of £12,570 but your income is £100,002, your Personal Allowance drops to £12,569, and so on for each additional £2 of income. By £125,140, it’s gone completely. The 60% rate applies to all the income in between.
For every extra £2 you earn in this band, you pay 40% tax on the £2 itself (80p). You also lose £1 of tax-free allowance, which is now taxed at 40%, too (another 40p). When you add it up, that’s £1.20 of tax on every £2, an effective rate of 60%. It isn’t an official tax band, but it’s very real for anyone earning between £100,000 and £125,140.
Keep in mind, it’s your adjusted net income that HMRC looks at, not just your salary. This includes your total taxable income, such as:
- Bonuses and commission
- Rental income
- Savings interest
- Dividends
- Taxable benefits, such as a company car or private medical cover
HMRC then takes off certain deductions, including:
- Pension contributions
- Gift Aid donations
Living in Scotland? Scottish income tax bands and rates are different, which makes the effective rate in this band even higher.
How the 60% Tax Trap Works
Understanding how the 60% tax trap works is easier when you take a look at the numbers. In our table below, we’ll look at how much income tax you’d pay at different salaries, and how much of each extra pound goes to HMRC.
| Salary | Personal Allowance Left | Income Tax | Take-Home | Tax on Income Above £100k |
| £100,000 | £12,570 | £27,432 | £72,568 | — |
| £110,000 | £7,570 | £33,432 | £76,568 | £6,000 on £10,000 (60%) |
| £125,140 | £0 | £42,516 | £82,624 | £15,084 on £25,140 (60%) |
| £130,000 | £0 | £44,703 | £85,297 | 45% on income above £125,140 |
Figures don’t include National Insurance or other deductions.
To put it simply, for every additional £1,000 you earn between £100,000 and £125,140, you’ll keep around £400. Once you add 2% employee National Insurance, that’ll drop to £380, effectively around 62%.
Once your Personal Allowance has gone completely at £125,140, the rate on each extra pound falls back to 45%. The 60% tax trap only comes in the band between £100,000 and £125,140, which means the highest rate of tax most employees will ever pay sits below the top tax band.
How Does the 60% Tax Trap Impact Bonuses?
As the £100,000 threshold applies to your total income, a bonus can mean you reach the 60% zone, even if your basic salary is below it. In fact, commission payments and one-off shares do the same thing.
For example, if you earn a £100,000 salary and receive a bonus of £8,000, you’ll lose £4,000 of your Personal Allowance.
Your tax bill will go up by £4,800 and, after National Insurance, you’ll keep around £3,040 of the £8,000 bonus.
What Else Changes When You Earn Over £100k?
There are other implications of earning over £100k that you need to be aware of to ensure you’re on top of your actual earnings. You’ll also lose the following benefits:
- Tax-Free Childcare: Worth up to £2,000 a year per child or £4,000 for disabled children. If either parent’s adjusted net income goes over £100,000, even by £1, you’ll lose this benefit.
- Funded Childcare Hours: In England, you can get up to 30 hours a week of funded childcare for eligible children from 9 months old. Once either parent goes over £100,000, you’ll lose this entitlement. For children aged three or four, it drops back down to the universal 15 hours.
In practice, you could actually be worse off when you lose these two benefits. Say you earn £99,000, have two children and use the full Tax-Free Childcare top-up for both. A £3,000 pay rise means you now earn £102,000.
You’ll have an extra take-home pay of around £1,340 but lose the £4,000 benefit, leaving you down £2,660.
Once you earn more than £125,140, you’ll need to pay the 45% additional rate. Your Personal Savings Allowance drops to nothing, meaning interest outside of an ISA becomes taxable.
Will Your Tax Code Change, and Do You Need a Tax Return?
Your tax code is likely to change once you earn over £100,000, as tax codes are what tell your employer how much tax-free income you should get.
Most people are on the tax code 1257L, reflecting the full £12,570 Personal Allowance. However, once you earn over £100,000, your code should go down to factor in the allowance you lose.
For example, a salary of £110,000 with no other adjustments will see a drop to £7,570 for Personal Allowance, meaning the tax code should be 757L.
HMRC sets your code according to what it expects you to earn. As such, a pay rise midway through the year might not be picked up right away. If your code is wrong, it’s important to let HMRC know as soon as possible to avoid a tax bill later on.
Wondering about tax returns? If all your income is taxed through PAYE, you won’t usually need a Self Assessment tax return just because you earn over £100,000. You will probably need one if you:
- have self-employment or rental income
- have large amounts of savings interest, dividends or other untaxed income
- have capital gains to report
- want to claim higher-rate tax relief on personal pension contributions or Gift Aid donations
Pension contributions and Gift Aid can reduce your adjusted net income, winning back your Personal Allowance, but you’ll likely need to claim the extra relief yourself.
You can find your tax code on your payslips, as well as on a P60 or your HMRC personal tax account.
How to Reduce the Impact of Earning Over £100k
To reduce the impact earning over £100k can have, you need to look at how to bring adjusted net income back down. There are a few methods to consider:
- Pay More Into Your Pension: If you earn £110,000 and sacrifice £10,000 into your pension, your adjusted net income drops to £100,000, and you earn back the full Personal Allowance. You’ll save £6,200 in tax and National Insurance, meaning your contribution costs just £3,800.
- Use Salary Sacrifice for Benefits: Swapping some of your salary for benefits like an electric company car or cycle-to-work scheme helps lower your adjusted net income, too.
- Give Through Gift Aid: Donations through Gift Aid reduce your adjusted net income by the gross amount. For example, in the 60% zone, an £800 donation costs only £400.
- Plan Bonuses, Savings and Investments: You might be able to sacrifice part of your bonus into your pension or use tax-advantaged share schemes. Interest and dividends in an ISA don’t count as part of your adjusted net income.
Haggards Crowther Provides Expert Advice for High Earners
Here at Haggards Crowther, we’ve been advising high earners on how to make the most of their income for more than 20 years.
We’re on hand to help make sense of tax regulations and outline the strategies that will be the most effective for you. If you’re not sure how to protect your salary of £100k or more, get in touch with us today to see how we can help.
You can reach us on 020 7384 0920 for Parsons Green or 020 7384 4898 for Putney. Alternatively, fill out our contact form, and we’ll be in touch.
