The Personal Allowance Taper: Why Income Between £100,000 and £125,140 Is Taxed at 60%

Most people assume the highest marginal tax rate in the UK is 45%. In one specific income band, it is effectively far higher — because as your income rises past £100,000, you do not just move into a higher tax band, you also start losing the tax-free Personal Allowance itself.

How the taper works

The standard Personal Allowance lets you earn a set amount — currently £12,570 — before paying any Income Tax at all. Once your adjusted net income exceeds £100,000, the allowance is reduced by £1 for every £2 of income above that threshold. By the time income reaches £125,140, the allowance has been tapered away to zero.

Why the effective rate hits 60%

Within the £100,000 to £125,140 band, each extra £2 earned causes £1 of Personal Allowance to disappear, which itself becomes taxable at 40%. Combined with the 40% higher rate tax already due on the income itself, the effective marginal rate on earnings in this band works out at around 60% — higher than the 45% additional rate that only applies well above £125,140.

What counts as 'adjusted net income'

This is not simply your salary or headline profit. Adjusted net income is your total taxable income from all sources — employment, self-employment, dividends, rental income, savings interest — minus certain reliefs, including gross pension contributions and Gift Aid donations grossed up. This is exactly why those two reliefs are the main legitimate planning tools in this band.

Ways people plan around the taper

• Increasing pension contributions to bring adjusted net income back below £100,000, which can restore some or all of the Personal Allowance while also building retirement savings.
• Making Gift Aid donations, which are grossed up and reduce adjusted net income in a similar way.
• For company directors, adjusting the salary/dividend/retained-profit mix for a tax year where income would otherwise land in the taper band.
• Timing when income or dividends are drawn, where there is genuine flexibility to do so, to avoid a single tax year peaking in the £100,000 to £125,140 range.