The £100,000 Personal Allowance Trap Explained

What is the personal allowance trap?

For every £2 of income above £100,000, you lose £1 of your £12,570 personal allowance. The allowance is completely withdrawn at £125,140. In this band, you effectively pay tax on the income and lose the allowance — creating a 60% effective marginal rate.

The maths behind 60%

On £2 of additional income above £100,000: you pay 40% income tax = 80p. You also lose £1 of personal allowance, which was sheltering £1 from 40% tax — that's another 40p. Total extra tax on £2 of income = £1.20. Effective rate = 60%.

Who is affected?

Directors with combined salary and dividend income between £100,000 and £125,140. A director taking £12,570 salary and £90,000 in dividends sits comfortably below the threshold. But a director with £70,000 in dividends on top of salary is firmly inside the trap.

How to avoid the trap

Employer pension contributions are the most powerful tool. They reduce company profits directly, without any personal tax charge. A £25,000 employer pension contribution on a £125,000 income brings adjusted net income to £100,000 — fully restoring the personal allowance and saving up to £5,028 in income tax.

Gift Aid donations also reduce adjusted net income, though they require cash outflow from personal funds rather than company funds.

Practical planning

Review your projected income before the end of each tax year. If you are on track to exceed £100,000, instruct your accountant to make an employer pension contribution before the company year-end. This is one of the highest-value tax planning actions available to directors.