The loss of Personal Allowance is one of those tax quirks that catches a lot of people off guard. For 2026/27, the standard Personal Allowance — the amount of income you can earn before paying any tax — is £12,570. Straightforward enough. But once your income exceeds £100,000, HMRC begins to claw it back at a rate of £1 for every £2 you earn above that threshold. By the time you reach £125,140, the allowance is gone entirely.

The result is a marginal tax rate of 60% on income between £100,000 and £125,140. Not a headline rate. Not a special penalty. Just the combined effect of paying 40% income tax on your earnings and simultaneously losing tax-free allowance worth another 20p in the pound. It is a significant but entirely legal quirk of the system — and one that, with the right planning, can often be managed down.

This post explains how the taper works, who it affects, and what options are worth considering.

The mechanics are simpler than they first appear. Your Personal Allowance of £12,570 is reduced by £1 for every £2 your adjusted net income exceeds £100,000. So at £110,000 of income, £5,000 of your allowance has been removed — leaving you with £7,570 of tax-free income. At £125,140, the allowance reaches zero.

The 60% effective rate arises because every extra pound you earn in this band does two things at once: it is taxed at the higher rate of 40%, and it also erodes your Personal Allowance, exposing an additional 40p of previously untaxed income to tax. The combined effect is 60p of tax for every pound earned in that band.

Here is a simplified illustration:

• Income of £99,999: full £12,570 Personal Allowance applies.
• Income of £110,000: Personal Allowance reduced to £7,570 — you have lost £5,000 of tax-free income.
• Income of £125,140 or above: Personal Allowance is nil. You pay tax on every pound of income from the first.

It is also worth noting that the additional-rate threshold — the point at which the 45% rate kicks in — was lowered from £150,000 to £125,140 in April 2023. This was not accidental; it aligned the additional-rate threshold precisely with the point at which the Personal Allowance disappears, tidying up the structure at the top of the income spectrum.

With the Personal Allowance frozen at £12,570 until at least 2027-28 and wages gradually rising across the economy, the number of people caught by this taper has grown considerably. The Office for Budget Responsibility estimated that the freeze on personal tax thresholds would create 2.1 million new higher-rate taxpayers — and those earning in the mid-to-upper six figures are increasingly at risk of straying into the £100,000 to £125,140 band without realising it.

In our experience, the people most commonly affected include:

• Company directors drawing a salary and dividends, where the combined figure crosses £100,000 in a good year.
• Contractors and consultants whose day-rate income fluctuates and can spike above the threshold unexpectedly.
• Employees who receive a bonus, a share award, or rental income on top of their base salary.
• Self-employed professionals — accountants, solicitors, consultants — whose profit grows steadily year on year.

PAYE can also create complications here. If an employer estimates that a salary will push an employee over £100,000, HMRC adjusts the tax code to remove the Personal Allowance — which can result in the wrong amount of tax being deducted month to month if the estimate turns out to be wide of the mark. Sorting out a PAYE coding notice that has gone wrong is something we deal with fairly regularly.

The key figure HMRC uses to calculate your Personal Allowance entitlement is your adjusted net income — broadly, your gross income minus certain deductions. This means there are legitimate ways to reduce that figure and, in some cases, recover all or part of your Personal Allowance.

Pension contributions

Making additional pension contributions — either personally or through your company — is the most widely used approach. A personal contribution reduces your adjusted net income directly. So if your income is £110,000 and you contribute £10,000 into a pension, your adjusted net income falls back to £100,000 and your full Personal Allowance is restored. The effective tax relief on that contribution, taking into account the recovered allowance, can be considerably higher than the standard higher-rate relief.

Gift Aid donations

Qualifying charitable donations under Gift Aid also reduce adjusted net income. The mechanics work similarly to pension contributions for this purpose. This is less commonly used as a primary planning tool, but it is worth factoring in if charitable giving is already part of your financial picture.

Salary sacrifice arrangements

For employed individuals, salary sacrifice schemes — for pension, cycle-to-work, or electric vehicle leasing — reduce gross pay and therefore adjusted net income. They are worth reviewing carefully if a bonus is pushing you over the threshold.

None of these routes are complicated in principle, but the interaction between them and your overall tax position does need to be modelled properly before you act.

The Personal Allowance taper is not the only threshold-based charge in this income range worth knowing about. The High Income Child Benefit Tax Charge operates on similar logic. If either partner in a household earns over £60,000, the charge begins — and by £80,000, Child Benefit is effectively fully taxed back.

This means that for households receiving Child Benefit, there is a second layer of effective marginal rate increase sitting alongside the Personal Allowance taper in certain income ranges. The two do not overlap exactly, but they can compound each other’s effect for families with children earning in the £60,000 to £125,140 range.

We mention this here because the planning strategies are often linked. A pension contribution that reduces adjusted net income to below £60,000 might eliminate the Child Benefit charge entirely — a meaningful saving that makes the pension contribution look even more attractive on a net basis.

If this applies to your situation, it is worth looking at both issues together rather than in isolation. Our guide to the Child Benefit Tax Charge covers that side of things in more detail.