The £100k Trap: How Directors Can Avoid the 60% Marginal Tax Rate

Bottom line: If your personal income from salary, dividends, and other sources is heading above £100,000, you're entering a zone where HMRC effectively charges you 60p tax on every extra pound. The fix is almost always an employer pension contribution — made before your company year-end.

Why 60% happens between £100,000 and £125,140

Here's what trips people up: the UK doesn't have a 60% tax rate. It just feels like it because of how the personal allowance taper works.

The personal allowance is £12,570 for 2026-27. Above £100,000, HMRC takes back £1 of that allowance for every £2 of extra income. By £125,140, your personal allowance is gone entirely.

In this band, you're paying 40% higher-rate income tax on each extra pound. But you're also losing £0.50 of personal allowance per pound — meaning previously tax-free income is now taxable, costing you another 40% on that restored amount. Combined: 60%.

For a director with £110,000 of total income: the £10,000 above £100,000 costs approximately £6,000 in tax. £6,000 gone on £10,000 received is a 60% rate — whatever you want to call it.

Strategy 1: employer pension contribution (the most powerful fix)

An employer pension contribution reduces your company's taxable profit. Less company profit means less dividend capacity. Less dividends means lower personal income. It's the cleanest solution because it solves the problem at source — before income even reaches you personally.

Example: Your company has £130,000 profit. You want to take your £12,570 salary and £87,430 in dividends — total income £100,000. That just fits. But if you make a £30,000 employer pension contribution first, taxable profit drops to £100,000. You take your £12,570 salary and £37,700 dividends (filling the basic rate band). Personal income: £50,270. Tax saved compared to extracting everything: enormous.

The pension contribution itself saves corporation tax. The reduction in dividends saves 33.75% dividend tax on what you didn't extract. The £100k trap is completely avoided. This is why most well-advised directors with significant profits end up with large pension pots — not just for retirement, but because it's the most tax-efficient use of excess profit.

Strategy 2: limit your dividend extraction

The simplest approach: don't take dividends that push you over £100,000 this tax year. Leave the excess profit in the company. You can extract it in future years when your income might be lower — after a quieter trading period, in retirement, or when you've used up pension allowances and dividends are the only option left.

Retained profit in the company pays corporation tax (19–25%), but it sits there waiting for a tax-efficient opportunity. Many directors accumulate retained profit for years and draw it down slowly in retirement at basic-rate dividend tax rates.

Golden nugget: it's about adjusted net income, not gross income

The personal allowance taper is based on your adjusted net income — which is gross income minus certain reliefs including Gift Aid donations and personal pension contributions. If you've already crossed £100,000 in personal income and can't claw it back via company pension, a personal Gift Aid donation is one of the few remaining levers. A £10,000 gross Gift Aid donation (you pay £8,000, the charity reclaims £2,000 basic rate relief) reduces adjusted net income by £10,000 — potentially restoring some or all of your personal allowance.

Strategy 3: time your dividends across tax years

As a director-shareholder, you largely control when dividends are declared and paid. A dividend declared on 5 April falls in the current tax year; one on 6 April falls in the next. If your income in one year is tracking toward £105,000, consider whether you can defer £10,000 of dividends to the following April — keeping both years under the £100,000 threshold.

This requires a board minute and dividend voucher with the correct date. It doesn't require any operational change to the business. The company's money stays in the company until you're ready to declare — you control the timing entirely.

Strategy 4: Income splitting with a spouse or civil partner

If your spouse or civil partner holds shares in the company, dividends can be paid to them directly. This splits income between two people — both using their own personal allowances and basic rate bands. A director earning £130,000 who shifts £30,000 to a spouse on lower income can save significant tax. The shares must be genuinely held by the spouse (not a nominee arrangement), and the arrangement must have real economic substance. A 'settlers' trust' or alphabet share structure requires specialist advice to ensure HMRC doesn't treat the income as yours.

The combination approach

In practice, directors with profits around £100,000–£150,000 typically combine strategies: an employer pension contribution absorbs the top slice of profit, dividends are taken up to £100,000 adjusted net income, and any remaining profit stays in the company for future years. Review your position in January each year — before the tax year ends — so you have time to act before 5 April.