MANY of us can only dream of earning more than £100,000 a year – nearly three times more than the average salary.
But experts have warned that high-earners are being left thousands of pounds worse off thanks to cliff edges in the tax system.
This is because those who earn between £100,000 and £125,140 are hit with the highest effective tax rates in the country.
Every worker has a £12,570 personal allowance, which is the amount of money you can earn before you start to pay tax.
But once you earn more than £100,000 the allowance starts to fall and for every £2 you earn above the threshold, you lose £1 of your allowance.
It disappears entirely when you earn more than £125,140 a year.
This means that in this danger zone your tax rate is effectively 60% and you only keep £400 of every £1,000 you earn.
This year, around 723,000 workers will be hit by this tax trap, according to figures obtained from HM Revenue and Customs by NFU Mutual.
In comparison, around 371,000 people were caught in this net in 2020-21.
Meanwhile, when you add on National Insurance at 2%, these workers are effectively being taxed at 62%.
This means they only keep £38 of every £100 they earn.
Rachael Griffin, tax and financial planning expert at Quilter said: “Many more people are now finding themselves caught in the so-called £100,000 tax trap, where the system can feel particularly punitive.
“The cumulative effect is a system that can actively disincentivise progress and dampen ambition at precisely the point where people should be encouraged to advance.”
Widening tax trap
The number of workers set to be caught in this tax trap is expected to rise to 850,000 by 2028-2029 thanks to a concept called fiscal drag.
This is when workers are pulled into higher income tax brackets as inflation pushes their wages up.
Income tax bands are frozen until April 2028, which means thousands of workers will be forced to hand over more of their hard-earned cash to the taxman in the meantime.
In total, HM Revenue and Customs predicts that 2.25 million workers will lose some or all of their personal allowance by 2028-29 because their earnings will exceed the £100,000 threshold.
But high earners could face paying more than £7,000 in extra tax income if the Chancellor freezes the current tax thresholds until 2030, warns wealth manager Rathbones.
If this happens, someone who earned £100,000 in 2022 could pay £7,077 more in tax than if thresholds had kept pace with inflation.
Blow for families
Parents are also dealt a blow when they earn more than £100,000 as they begin to lose valuable free childcare hours.
Families can get up to 30 hours of free childcare a week through the Free Childcare for Working Parents scheme for children over 9 months from September 2025.
But families where one parent earns more than £100,000 in a tax year are not eligible and miss out on the hours.
You also lose tax-free childcare perk, which gives £2,000 per year, per child, once you earn over £100,000.
A parent who was earning £99,000 and receives a £2,000 pay rise would miss out on almost £28,000 in tax and childcare subsidies, investment platform AJ Bell warns.
The breadwinner would need to earn around £156,000 before the family had the same total disposable income as when the breadwinner was earning £99,000.
Charlene Young, senior pensions and savings expert at AJ Bell, said: “This puts some parents in the ridiculous place where they are effectively worse off earning between £100,000 and £156,000 on paper”.
Avoiding the danger zone
One way to avoid being hit by the tax trap is to reduce the amount of income you earn.
Before you do this make sure you have enough money to cover day to day expenses such as a mortgage, household bills and council tax.
You can keep hold of your cash and reduce your tax bill at the same time by increasing the amount you pay into your pension.
Many companies pay into their employees pensions through a scheme called salary sacrifice.
This allows employees to exchange part of their salary for a pension contribution from their employer.
As a result, you pay less tax and National Insurance.
Boosting your pension contribution by even 2% could help to bring your salary back below the £100,000 threshold if you are at risk of tipping over the edge.
Ade Babatunde, senior financial planning director at Rathbones, said: “Maximising ISA and pension allowances, and increasing pension contributions, can help offset the impact.
“Professional financial advice can ensure more of your money works for you.”
Some companies also offer cycle-to-work or car schemes through salary sacrifice.
These can also help you to reduce your income to below the threshold.
You could also buy additional holiday days to help you reduce your income.
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