What happens when you earn over £100,000? Understanding the £100,000 tax trap

Reaching an income of £100,000 can feel like a significant financial milestone, but it is also an important point in the UK tax system, particularly for parents with young children.

If you earn £110,000 and have two young children, that extra £10,000 above the £100,000 threshold could have a much bigger impact on your finances than you might expect.

This is because several tax allowances and childcare benefits can be affected once your income crosses £100,000. Understanding how the rules work can help you plan ahead.

What happens at £100,000?

There are several things to be aware of when your income crosses this threshold.

Your tax free Personal Allowance starts to reduce. For every £2 of income above £100,000, you lose £1 of your £12,570 Personal Allowance. This creates an effective 60% rate of income tax on earnings between £100,000 and £125,140.

You may lose Tax Free Childcare. This government scheme contributes £2 for every £8 you pay towards childcare, up to £2,000 per child each year. Eligibility is affected when either parent’s adjusted net income exceeds £100,000.

You may also lose access to funded childcare hours. For families with young children, this support can be worth thousands of pounds each year, making the £100,000 threshold particularly important when planning your finances.

What makes this interesting is that eligibility is based on individual rather than combined household income. Two parents each earning £99,000 could have a household income of £198,000 and remain eligible, while a household where one parent earns over £100,000 may lose access to this support.

Let's do the maths

What happens - 40% tax on the additional £10,000

Potential cost- £4,000

What happens - Loss of £5,000 Personal Allowance, taxed at 40%

Potential cost - £2,000

What happens - Lost Tax Free Childcare top ups

Potential cost - £2,000

What happens - Lost funded childcare hours

Potential cost - £10,000 to £12,000

Total potential impact - £18,000 to £20,000

The exact impact will depend on individual circumstances, but it demonstrates why the £100,000 threshold is an important one to understand and plan around.

Where pension contributions can help?

Pension contributions can play an important role in planning around the £100,000 threshold.

Depending on how contributions are made, they can reduce your adjusted net income. A well-timed pension contribution could therefore bring your income back towards or below £100,000, potentially restoring your Personal Allowance and eligibility for childcare support.

In our example, a £10,000 pension contribution could:

• Bring adjusted net income back towards £100,000
• Reduce the amount of income tax payable
• Restore some or all of the Personal Allowance
• Potentially restore eligibility for childcare support

At the same time, the contribution is going towards your retirement.

This is not simply about reducing a tax bill. It is about understanding how your income, pension contributions and available allowances work together as part of your wider financial plan.

Why planning ahead matters?

Your overall income may include more than your basic salary.

Bonuses, rental income, dividends and other sources of income can all affect your position. A bonus towards the end of the tax year, for example, could take your income above £100,000 when you were not expecting it.

There are also limits on pension contributions, including the annual allowance, which is £60,000 for most people and can be lower for some higher earners.

Pension contributions should therefore be considered as part of your wider financial circumstances rather than purely as a way of managing tax.

What to do next?

If your income is approaching £100,000, particularly if you receive bonuses or income from several sources, it is worth understanding your position before the end of the tax year.

Pension contributions can be a valuable planning tool, but they need to work alongside your wider financial plans, rather than being considered purely from a tax perspective.

We can help you understand how the £100,000 threshold affects you, explore the options available and consider how pension contributions could fit into your wider financial plan. Book an initial consultation with one of our advisers to discuss your position and the options available to you.

Important Information

This information is for general guidance only and does not constitute personal financial advice. You should seek professional advice tailored to your individual circumstances before making any financial decisions.

Pensions are designed to help fund retirement, so money cannot usually be taken out until the minimum pension age. Pension and tax rules may change, and benefits depend on your individual circumstances.

Tax treatment depends on individual circumstances and may be subject to change in the future. HM Revenue and Customs practice and the law relating to taxation are complex. The Financial Conduct Authority does not regulate tax planning.