The £100k Trap: How Directors Can Avoid the 60% Marginal Tax Rate
Income above £100,000 triggers a personal allowance taper creating a 60% effective rate. Here are the four strategies directors use to avoid it.
What the trap looks like
The personal allowance (£12,570) tapers above £100,000 — reducing by £1 for every £2 of income above the threshold. At £125,140, the personal allowance is fully withdrawn. This creates an effective 60% marginal tax rate within the £100,000–£125,140 band:
- 40% higher-rate income tax on the income itself
- Plus 40% on the personal allowance being withdrawn (because the formerly tax-free allowance is now taxable)
- = 60% combined
For a director with £110,000 of income (salary + dividends), the effective rate on the £10,000 above £100,000 is approximately 60% — meaning HMRC takes £6,000 of that £10,000.
Strategy 1: Employer pension contributions (most powerful)
An employer pension contribution reduces company profits, which reduces your dividend capacity. If you reduce company profit by making a pension contribution, you simply cannot extract as much as a dividend — keeping personal income below £100,000.
Example: Expected total income £115,000. Employer pension contribution of £15,000 reduces company profit, meaning only £100,000 can be distributed. The £15,000 contribution saves: 60% of £15,000 = £9,000 in personal tax, plus 25% CT saved = £3,750. Total value of the £15,000 pension: £12,750 in tax savings plus £15,000 in the pension.
Strategy 2: Limit dividend extraction
The simplest approach: don't extract dividends that push you above £100,000. Retain profit in the company and extract in future years when income might be lower — after a quiet contract period, or in retirement when you draw down retained profits at lower rates.
Strategy 3: Gift Aid donations
Personal Gift Aid donations reduce your adjusted net income. A £10,000 Gift Aid donation (where you pay £8,000 and the charity reclaims £2,000 basic rate relief) reduces adjusted net income by £12,500 (the gross amount). This can restore part of the personal allowance. Note: this requires actual cash outflow from personal funds.
Strategy 4: Timing income across tax years
If you can control when dividends are declared and paid (as a director-shareholder, you largely can), consider straddling the tax year boundary. A dividend declared on 4 April falls in the current tax year; one on 6 April falls in the next. Spreading income across two years at £100,000 each is more efficient than £200,000 in one year.
The combined approach
In practice, the best outcome comes from combining these strategies: employer pension to absorb excess profit, careful dividend timing to spread income, and monitoring adjusted net income through the year. Set a calendar reminder for January each year to review your projected income and take action before 5 April.
Related calculators
Frequently asked questions
Does dividend income count toward the £100k threshold?
What if I've already gone over £100,000 this year?
Disclaimer: This article is for general information only and does not constitute tax or legal advice. Tax rules change — verify with HMRC or a qualified accountant before making decisions. Published 6 April 2026 for 2026-27.