The loss of Personal Allowance is one of the most counterintuitive quirks in the UK tax system. Most people know that earning more means paying more tax — but what catches higher earners off guard is that once your income crosses £100,000, you don’t just pay a higher rate on the extra pounds. You also start losing the tax-free allowance you’ve had on your first £12,570 of income, effectively meaning the government taxes the same pounds twice over.

The result is an effective marginal tax rate of 60% on income between £100,000 and £125,140. That’s not a typo. For every £2 you earn above £100,000, you lose £1 of your Personal Allowance — which means more of your lower income becomes taxable at 40%, stacking on top of the 40% you already owe on the higher earnings themselves.

In our experience, this affects a wider range of people than most expect — contractors who’ve had a strong year, business owners drawing dividends alongside a salary, and employed professionals receiving bonuses. Here’s how it works, and what can actually be done about it.

For the 2026–27 tax year, the standard Personal Allowance is £12,570. This is the amount of income you can earn without paying any income tax at all. It applies to everyone by default — but it comes with a significant catch for higher earners.

Once your adjusted net income exceeds £100,000, HMRC begins reducing your Personal Allowance by £1 for every £2 of income above that threshold. So at £102,000 of income, your Personal Allowance drops to £11,570. At £110,000, it’s £7,570. By the time you reach £125,140, it’s gone entirely — reduced to zero.

The phrase “adjusted net income” matters here. It’s not simply your salary or your profits — it’s your total income from all sources (employment, self-employment, rental income, dividends) minus certain deductions, most notably pension contributions and Gift Aid donations. That distinction is important because it’s the basis for the planning opportunities we’ll cover shortly.

It’s also worth noting that this threshold hasn’t moved in years. The £100,000 figure has been frozen while wages and business profits have risen, which means this trap is catching more people every tax year than it used to.

The 60% figure isn’t something HMRC labels explicitly — it’s the combined effect of two things happening at once in that £100,000 to £125,140 band.

First, you’re already paying 40% income tax on income above the higher-rate threshold (which sits at £50,270 for most people in 2026–27, being the sum of the Personal Allowance and the basic rate band of £37,700).

Second, as your income rises above £100,000, each additional £2 of earnings costs you £1 of Personal Allowance. Losing £1 of tax-free allowance means that £1 — which was previously sheltered — now gets taxed at 40%. So that extra £2 of gross income generates 40p of tax on itself, plus 40p of tax on the newly exposed allowance. That’s 80p of tax on £2 of income, or 40% plus an effective additional 20% — totalling 60%.

To put that in cash terms: if your income moves from £100,000 to £110,000, you earn an additional £10,000 — but you take home only £4,000 of it. The remaining £6,000 goes in income tax. For most people, seeing that calculation laid out clearly is the moment it becomes urgent to do something about it.

It’s tempting to assume this only affects people on very high salaries, but we regularly see this issue arise for clients who wouldn’t describe themselves as high earners in any conventional sense.

Employed people with bonuses

An employee on a £90,000 base salary who receives an annual bonus of £15,000 will find themselves well inside the trap — and may not have adjusted their tax code or thought about pension planning ahead of time.

Business owners drawing salary and dividends

A limited company director taking a modest salary topped up with dividends needs to think carefully about the total picture. If combined income crosses £100,000, the loss of Personal Allowance kicks in regardless of how the income is structured. The dividend allowance for 2026–27 is just £500, so most dividend income above that will be taxed — and counted towards adjusted net income.

Landlords and investors

Property income, savings interest, and other investment returns all form part of adjusted net income. A landlord with a growing portfolio may find that a good year in the property market pushes their total income into the trap zone unexpectedly.

The common thread is that people often don’t know this is happening until they see their Self Assessment bill — at which point the planning window has closed.

The most effective tool available — and the one we most commonly help clients use — is pension contributions. Making a personal pension contribution reduces your adjusted net income pound for pound. If your income is £115,000, a £15,000 pension contribution could bring your adjusted net income back down to £100,000, fully restoring your Personal Allowance and cutting out the 60% effective rate entirely.

The numbers can be striking. A £15,000 pension contribution made by a higher-rate taxpayer in the trap zone doesn’t just attract 40% tax relief in the usual way — the restored Personal Allowance effectively gives an additional 20% boost, meaning the true cost of that contribution can be as little as £6,000 net. That’s a significant return on what is, at root, money you’re saving for your own future.

Gift Aid donations work on a similar principle — they also reduce adjusted net income — though pensions are usually the more flexible and impactful option for most clients.

For company directors, there’s also the option of making contributions directly through the business as employer contributions, which don’t count as personal income at all and can be even more tax-efficient.

The key is planning before the end of the tax year, not after. Once 5 April has passed, the window for that year closes. This is exactly the kind of thing where working with an accountant throughout the year — rather than scrambling in January — makes a real difference.