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Losing Your Personal Allowance: The £100,000 Income Tax Trap Explained
Individuals with adjusted net income exceeding £100,000, including senior employees, directors extracting salary or dividends, and professionals receiving bonuses.
How the personal allowance is reduced once income exceeds £100,000, why it is fully withdrawn at £125,140, and how this creates an effective 60% marginal tax rate.
If your adjusted net income falls between £100,000 and £125,140, you may pay significantly more tax than expected due to the withdrawal of your personal allowance.
The £100,000 Threshold
Where adjusted net income exceeds £100,000, the personal allowance begins to be withdrawn.
The reduction applies at a rate of £1 for every £2 of income above £100,000.
The personal allowance is fully withdrawn once adjusted net income reaches £125,140.
The 60% Effective Marginal Rate
Between £100,000 and £125,140, the combined effect of higher rate tax and the withdrawal of the personal allowance produces an effective marginal tax rate of 60%.
This arises because:
- Income is taxed at the higher rate; and
- The personal allowance is reduced as income increases.
The taper therefore significantly increases the tax cost of income within this band.
Adjusted Net Income
The taper is based on adjusted net income.
This can include:
- Salary
- Bonuses
- Dividends
- Rental income
- Other taxable income
Where adjusted net income exceeds £100,000, the withdrawal calculation applies regardless of the source of income.
Application Across the UK
The personal allowance taper applies UK-wide.
Although income tax bands differ in certain parts of the UK, the withdrawal of the personal allowance between £100,000 and £125,140 operates on the same basis.
Real-World Scenarios
- A director increasing dividends may unintentionally push adjusted net income above £100,000.
- An employee receiving a performance bonus may enter the taper band.
- A professional with multiple income streams may exceed the £100,000 threshold when total income is combined.
In each case, the effective tax rate on additional income within the taper band can reach 60%.
Planning Considerations
You should consider what financial planning opportunities are available if your adjusted net income approaches or exceeds £100,000.
- Review income levels before the end of the tax year.
- Consider the impact of bonuses or dividends on adjusted net income.
- Assess whether action is required before 5 April.
Advance review of income levels can reduce exposure to the 60% effective marginal rate.
Managing the Loss of Personal Allowance Over £100,000
Once income exceeds £100,000, the Personal Allowance is gradually withdrawn, creating an effective 60% marginal tax rate that many taxpayers do not anticipate. Bonuses, dividends, rental income, or pension withdrawals can unexpectedly push you into this band. Seeking timely tax planning services London allows you to assess whether pension contributions, salary sacrifice, or income timing strategies can protect your allowance. Cigma Accounting, advising clients from our Kingston Upon Thames and supporting individuals in Berrylands and Surbiton, provides clear analysis to help you manage exposure proactively.
Failure to plan around the allowance taper can materially increase your overall tax bill and impact child benefit or other income-linked reliefs. Working with an experienced tax accountant in London ensures your remuneration and dividend strategy is structured efficiently before the tax year closes. Cigma Accounting offers practical, forward-looking support with physical offices across London, helping you preserve available reliefs while remaining fully compliant with HMRC rules.
RISKING THE LOSS OF YOUR PERSONAL ALLOWANCE?
Once income exceeds the taper threshold, your Personal Allowance is gradually withdrawn — creating an effective 60% marginal rate in some cases. Reviewing income levels and planning options early can help reduce unnecessary exposure.
Trusted guidance from London-based accountants, focused on accuracy, clarity, and compliance.
