Many taxpayers are surprised to discover that their effective rate of Income Tax can rise to 60% once income exceeds £100,000, even though there is no official 60% tax band in the UK tax system. This arises due to the gradual withdrawal of the Personal Allowance.
For the 2026/27 tax year, the standard Personal Allowance is £12,570. However, where an individual’s adjusted net income exceeds £100,000, the allowance is reduced by £1 for every £2 of income above this threshold.
This rule applies irrespective of age and means that any additional taxable income above £100,000 can trigger both Income Tax on the extra earnings and a reduction in the tax-free allowance available.
The impact can be illustrated as follows:
If an individual has adjusted net income of £100,000, they would normally retain their full Personal Allowance.
If income increases by £1,000 to £101,000:
- The additional £1,000 is taxed at 40% = £400;
- The Personal Allowance is reduced by £500; and
- That additional £500 of income becomes taxable at 40% = £200.
As a result, the total additional tax payable on the extra £1,000 of income becomes £600, producing an effective marginal tax rate of 60%. This position continues until adjusted net income reaches £125,140, at which point the Personal Allowance is fully withdrawn.
Adjusted net income broadly refers to total taxable income before Personal Allowances, less certain deductions and reliefs, including:
- Qualifying pension contributions;
- Gift Aid charitable donations;
- Certain trading losses; and
- Other allowable tax reliefs.
Individuals affected by this “Personal Allowance trap” should consider proactive tax planning. Depending on circumstances, reducing adjusted net income below £100,000 may be achieved through:
- Increasing pension contributions;
- Making charitable donations under Gift Aid; or
- Considering other tax-efficient investment arrangements where appropriate.
Professional advice should be obtained before implementing planning strategies to ensure they remain suitable and commercially appropriate.
