If you think a salary increase above £100,000 will automatically boost your take-home pay—think again. A little-known UK tax rule creates one of the steepest tax cliffs in the world, causing high earners to lose a shocking 60% of each additional pound they earn between £100,000 and £125,140.
This article breaks down why earning just £1 over the six-figure threshold can cost you thousands, how the tax system punishes rising income, and what employees and HR teams must understand before negotiating salaries, bonuses and benefits.
Why This Matters for Employees and Employers
For UK workers, especially those in tech, finance, consulting, engineering, and executive roles, crossing the £100k line can dramatically change your financial situation.
For HR teams, compensation managers and CFOs, understanding this tax cliff is essential to:
- Structure fair and competitive compensation packages
- Avoid employee dissatisfaction or “unexpectedly small” pay increases
- Offer smart alternatives such as pension contributions and salary sacrifice
- Support employee wellbeing with transparent financial education
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The £100,000 Threshold: What Really Happens to Your Taxes
Most people assume that as your income rises, you simply pay a bit more tax. But in the UK, once you cross £100,000, something unusual happens.
1. You Start Losing Your Personal Allowance
Every UK taxpayer receives a £12,570 tax-free Personal Allowance.
But when your Adjusted Net Income exceeds £100,000:
- You lose £1 of allowance for every £2 you earn above £100,000
- At £125,140, your Personal Allowance hits £0
Source: UK Government – Personal Allowance Withdrawal
Losing the allowance means more of your income becomes taxable, and the system effectively taxes you twice on part of your earnings.
2. This Creates a Hidden “60% Marginal Tax Rate”
Between £100,000 and £125,140, every extra £1 earned is hit with:
- 40% income tax
- Loss of tax-free allowance (equivalent to another 20%)
Total: 60% effective marginal tax
Full explanation: MoneyHelper UK – How Personal Allowance Works
That means:
- A £10,000 salary increase may add only ~£4,000 to your net pay
- In many cases, you keep just 38–42p per £1 after tax and NI
No wonder employees feel like they’re taking home far less than expected.
3. Additional Rate Tax Kicks in After £125,140
Once your Personal Allowance is fully gone, additional income above £125,140 is taxed at:
- 45% income tax, plus
- 2% National Insurance
And because your tax-free allowance is already lost, your baseline tax bill is even higher.
4. Frozen Thresholds Make the Situation Worse
The UK tax thresholds have been frozen until 2028, meaning:
- Inflation and raises drag more earners into the £100k+ bracket
- More professionals experience the 60% marginal tax band
- Payroll budgets stretch further as more compensation triggers punitive taxation
This phenomenon is known as fiscal drag, and it silently increases the tax burden on employees each year.
Example: What You Actually Take Home
Here’s a simplified view of what happens to net pay:
| Gross Salary | Net Take-Home (approx.) |
| £100,000 | £67,560 |
| £110,000 | £70,860 |
| £120,000 | £74,160 |
| £125,140 | £75,842 |
Despite an increase of £25,140 in salary, the net gain is only £8,282.
What Employees Can Do About It
Employees earning near or above £100,000 should consider:
1. Pension contributions
Salary sacrifice can preserve Personal Allowance and boost long-term savings.
2. Charitable donations (Gift Aid)
These reduce Adjusted Net Income, helping regain allowance.
3. Negotiating bonuses differently
Non-cash benefits or employer-paid pension boosts may deliver higher value than cash.
4. Timing income strategically
For contractors, business owners, or those with variable pay.
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What HR Directors and Employers Should Communicate
To avoid confusion or employee frustration, HR teams should proactively explain:
- Why a raise may produce a smaller-than-expected net increase
- The effects of the £100k–£125k tax zone
- The benefits of pension contributions or salary-sacrifice arrangements
- How structured pay packages can avoid triggering unnecessary tax losses
Providing this education supports employee engagement and financial wellbeing—core elements of a strong company culture.
Final Thoughts
Earning more than £100,000 per year in the UK doesn’t always mean taking home more money. In fact, due to the Personal Allowance taper, many employees find that the pay rise they worked so hard for is swallowed by an unexpectedly harsh tax structure.
Understanding this system is crucial for employees, HR leaders, and employers alike. Transparent communication and smart compensation planning can help reduce the impact of the tax trap and ensure workers feel valued, supported, and informed.
Disclaimer:
This article is for informational purposes only and does not constitute legal, financial, or tax advice. Please consult a qualified tax professional for guidance specific to your circumstances.