Many taxpayers are surprised to learn that once their income exceeds £100,000, they can face an effective tax rate of 60%, although officially, no such rate appears to exist. This happens when the personal allowance (currently £12,570) is gradually withdrawn once adjusted net income goes above £100,000.

Under the tax rules, if a taxpayer earns over £100,000 in any tax year, their personal allowance is gradually reduced by £1 for every £2 of adjusted net income exceeding £100,000. This ceiling applies regardless of age, meaning that any taxable receipt that pushes their income above this threshold will lead to a reduction in their personal tax allowance.

This is best demonstrated by way of an example. If a taxpayer earns exactly £100,000 they would usually benefit from the full personal allowance. However, if their income increases by £1,000 to £101,000 then:

• £1,000 is taxed at 40% = £400
• Their personal allowance is reduced by £500
• That £500 is now also taxed at 40% = £200

Total tax on the extra £1,000 = £600, creating an effective tax rate of 60%.

This continues until adjusted net income reaches £125,140, at which point the personal allowance is fully withdrawn.

Adjusted net income refers broadly to a taxpayer’s total taxable income before personal allowances, minus certain tax reliefs such as trading losses, charitable donations, and pension contributions.

Affected taxpayers should consider financial planning strategies to avoid this personal allowance trap. Reducing income below £100,000 could be achieved through options such as increasing pension contributions, making charitable donations, or participating in certain investment schemes.