How Higher Earners Can Reduce Their Tax Bill and Potentially Get It Back
For the 2026/27 tax year, most UK taxpayers are entitled to a Personal Allowance of £12,570. However, once your adjusted net income exceeds £100,000, your Personal Allowance starts to reduce. This can result in an effective tax rate of 60% on part of your income. The good news is that, with appropriate planning, it may be possible to reduce your adjusted net income and restore some or all of your Personal Allowance. How Does the £100,000 Rule Work? Your Personal Allowance is reduced by £1 for every £2 that your adjusted net income exceeds £100,000. This means:| Adjusted Net Income | Reduction in Personal Allowance | Personal Allowance Remaining |
|---|---|---|
| £100,000 | £Nil | £12,570 |
| £105,000 | £2,500 | £10,070 |
| £110,000 | £5,000 | £7,570 |
| £115,000 | £7,500 | £5,070 |
| £120,000 | £10,000 | £2,570 |
| £125,140 or above | £12,570 | £Nil |
Therefore, once adjusted net income reaches £125,140, the entire Personal Allowance is lost.
The 60% Effective Tax Rate
The withdrawal of the Personal Allowance creates an additional tax charge.
For an individual paying Income Tax at 40%, every additional £2 of income between £100,000 and £125,140 results in the loss of £1 of Personal Allowance.
The £1 of lost allowance is then also taxed at 40%.
As a result, income within this range can effectively be taxed at 60%.
Example
If your adjusted net income increases from £100,000 to £110,000:
- Additional income: £10,000
- Personal Allowance lost: £5,000
- Tax on additional income at 40%: £4,000 A
- Additional tax due to loss of Personal Allowance: £2,000
Total additional tax: £6,000
This represents an effective tax rate of 60%.
What Is Adjusted Net Income?
The £100,000 test is based on your adjusted net income, rather than simply your salary.
Broadly, adjusted net income includes:
- Employment income and bonuses, Self-employment profits
- Rental income, Dividends, Savings and investment income
- Other taxable income
It can then be reduced by certain qualifying deductions and reliefs, including:
- Gross pension contributions
- Gift Aid donations
- Certain qualifying trading losses
- Other eligible tax reliefs
This means that proper planning can sometimes reduce your adjusted net income below the £100,000 threshold.
Option 1 – Make Pension Contributions
For many higher earners, pension contributions are one of the most tax-efficient ways of reducing adjusted net income.
Example
Assume your adjusted net income is £110,000.
You are therefore £10,000 above the £100,000 threshold.
If you make a qualifying pension contribution that reduces your adjusted net income to £100,000:
- Your full £12,570 Personal Allowance may be restored.
- You may receive higher-rate Income Tax relief on the pension contribution.
- You may avoid the effective 60% tax charge on income between £100,000 and £125,140.
Depending on how the pension contribution is made, the gross contribution required and the method of obtaining tax relief can differ.
Important
Pension contributions are subject to the relevant annual allowance rules, and restrictions may apply depending on your circumstances, including the tapered annual allowance and the Money Purchase Annual Allowance.
Option 2 – Salary Sacrifice
Employees may be able to agree with their employer to sacrifice part of their salary or bonus in exchange for an employer pension contribution.
For example:
Salary/bonus: £110,000
Pension contribution through salary sacrifice: £10,000
Potential adjusted net income: £100,000
This may help restore the Personal Allowance.
Salary sacrifice can also provide National Insurance savings, depending on the arrangement.
However, the arrangement must be properly implemented and agreed before the relevant salary or bonus is earned.
Option 3 – Make Gift Aid Donations
Qualifying Gift Aid donations can also reduce adjusted net income.
Example
If your adjusted net income is £105,000 and you make a qualifying Gift Aid donation, the grossed-up amount of the donation may reduce your adjusted net income.
This could help recover some or all of your Personal Allowance.
Gift Aid can therefore be particularly valuable where income is slightly above £100,000.
You should retain appropriate records of donations and ensure that you have paid sufficient UK Income Tax and/or Capital Gains Tax to support the Gift Aid claimed.
Option 4 – Manage Bonuses and Other Income
Where possible, it may be beneficial to review the timing and structure of:
- Bonuses, Dividends, Business drawings, Rental income
- Investment income, Other significant taxable receipts
For example, if a bonus would take your income from £98,000 to £108,000, it may be worth considering whether part of the bonus could be:
- Paid directly into a pension, where appropriate;
- Deferred to another tax year, where commercially and legally possible; or
- Managed alongside other deductible payments.
Tax planning should always take account of commercial requirements and the relevant tax rules.
