For many UK families £100,000 is not just another milestone. It’s one of the most punishing tipping points in the tax system and crossing it can leave you materially worse off.
What makes this threshold so significant is not just the tax but what you lose alongside it.
Are you likely to be affected by the tax trap?
This is worth reviewing if you:
- Earn between £90,000 and £125,140
- Have children under school age
- Run your own business or control how you are paid
The cliff edge of £100,000
Once your adjusted net income exceeds £100,000 three key things start to disappear:
1) Tax-Free Childcare – Worth up to £2,000 per child each year (£4,000 if disabled)
2) 30 hours free childcare
3) Your personal allowance (the amount you can earn tax free each tax year) – Reduced by £1 for every £2 over £100,000 and fully lost by £125,140 This can create an effective marginal tax rate of 60%.
When combined particularly for families with young children, the result is counterintuitive: earning slightly more can leave you with significantly less.
What counts as adjusted net income?
This is where many people get caught out.
Net income is not just your salary. It includes bonuses, dividends, rental income and other taxable income, after certain reliefs such as pension contributions and Gift Aid.
This means it is possible to drift over £100,000 without realising the full impact until later.
The overlooked solution: pension contributions
There is however a legitimate and highly effective way to manage this.
Pension contributions directly reduce your adjusted net income which is the exact figure used to determine both childcare eligibility and personal allowance.
So, in reality you are not just reducing tax you are getting back benefits you would otherwise lose.
What this allows you to do
By making pension contributions you can:
- Bring your income back below £100,000
- Restore your full personal allowance
- Regain access to childcare support
- Receive income tax relief on contributions
- Save National Insurance where salary sacrifice is used, currently available until April 2029
It is one of the rare situations where tax planning, cashflow and long-term strategy all align.
If you run your own company
If you run your own company you often have more flexibility than you think.
Planning opportunities can include:
- Timing dividends across tax years
- Using employer pension contributions which are often more tax efficient than personal contributions
- Managing the balance between salary, bonus and dividends
- Keeping income just below key thresholds without reducing overall wealth
With the right structure this becomes a planning decision rather than a tax problem.
Watch out for one off income spikes
Crossing £100,000 does not have to be permanent to cause issues.
We often see this triggered by one-off bonuses, dividend payments or property income.
Even a temporary spike can remove childcare support for the year unless planned for in advance.
A real-world example
Household income
- £110,000 primary earner
- £50,000 partner
- One child under 2 in full time nursery
Before planning
Income above £100,000 means benefits are lost
- No 30 hours childcare support
- No Tax-Free Childcare
- Personal allowance partially withdrawn
- Effective extra tax of around £6,000
- Annual nursery cost around £13,299 (estimate amount)
After planning
A £10,000 salary sacrifice pension contribution brings adjusted income back to £100,000.
This unlocks:
- 30 funded hours from 9 months
- Reduced childcare costs to around £5,304 per year
- Tax-Free Childcare top up worth up to £2,000
- Full personal allowance restored
- Income tax relief on the pension contribution of around £6,000
Total annual benefit regained is approximately £16,000.
This is significantly more impactful than a modest pay rise and achieved entirely within existing HM Revenue & Customs rules.
A common mistake we see
Many people assume they will deal with this at year end, but by this point options can be limited particularly when it comes to salary, bonuses and dividend planning.
The most effective planning usually happens before income is received not after.
Why this is becoming more common
More and more over time this is becoming less of a niche issue.
Frozen tax thresholds are pulling more people into this range each year. Expanded childcare support has increased the size of the cliff edge. Salary sacrifice advantages are also time limited under current rules.
For many professionals and business owners, this is now one of the most valuable planning opportunities available.
What to do if this applies to you
If your income is approaching or just over £100,000, this is not something to leave to chance.
Relatively small adjustments can have a significant impact, not just on tax but on your overall financial position.
If you earn are near the £100,000 mark or expect to it is worth getting ahead of it early.
We’ll help you structure things properly so you keep more of what you earn without adding unnecessary complexity. Contact the team today.
